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Explaining Budgetary Indiscipline: Evidence From Spanish Municipalities

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  • Ignacio Lago-Peñas

    ()
    (Pompeu Frabra University)

  • Santiago Lago-Peñas

    ()
    (University of Vigo)

Abstract

. The search for political support leads ultimately to upward deviations from forecasted public deficits when i) budget procedures are soft, ii) breaking promises made on higher expenditures and the lowering of taxes is costly in political terms, and iii) ex-post control by voters and political opposition is imperfect. This hypothesis is tested using a data set from Spanish municipalities during the period 1985-1995. Econometric estimates demonstrate that single-party majority incumbents are less prone to change forecasted budgets. While their forecasted deficits tend to be higher, they have lower actual deficits, which may be interpreted as the consequence of a higher consistency in the budgetary process. Secondly, upward deviations in deficit tend to rise in election years. While forecasted deficits are not different in election years, actual deficits are. Moreover, elections cause systematic downward deviations in revenues. On the contrary, the incumbent’s ideology is not relevant when explaining deviations in deficit.

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Paper provided by Instituto de Estudios Fiscales in its series Working Papers with number 21-04 Classification-JEL : H74..

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Handle: RePEc:hpe:wpaper:y:2004:i:21

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Keywords: Budget deficits; local governments; budget procedures; electoral promises.;

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  1. Roubini, Nouriel & Sachs, Jeffrey D., 1989. "Political and economic determinants of budget deficits in the industrial democracies," European Economic Review, Elsevier, vol. 33(5), pages 903-933, May.
  2. Feenberg, Daniel R, et al, 1989. "Testing the Rationality of State Revenue Forecasts," The Review of Economics and Statistics, MIT Press, vol. 71(2), pages 300-308, May.
  3. Blais, Andre & Nadeau, Richard, 1992. " The Electoral Budget Cycle," Public Choice, Springer, vol. 74(4), pages 389-403, December.
  4. Carlos Mulas-Granados, 2003. "The Political and Economic Determinants of Budgetary Consolidation in Europe," European Political Economy Review, European Political Economy Infrastructure Consortium, vol. 1(Spring), pages 15-39.
  5. James M. Poterba & Jürgen von Hagen, 1999. "Fiscal Institutions and Fiscal Performance," NBER Books, National Bureau of Economic Research, Inc, number pote99-1.
  6. Alberto Alesina & Roberto Perotti & José Tavares, 1998. "The Political Economy of Fiscal Adjustments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 197-266.
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Cited by:
  1. Goeminne, Stijn & Geys, Benny & Smolders, Carine, 2007. "Political fragmentation and projected tax revenues: evidence from Flemish municipalities," Discussion Papers, Research Unit: Market Processes and Governance SP II 2007-03, Social Science Research Center Berlin (WZB).

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