Dynamics of Political Budget Cycle

The strategic manipulation of fiscal variables in relation to elections is a hotly debated issue in economics and political economy. In this realm, the paper considers the case of an incumbent politician who derives utility from voting support and dis-utility from primary deficit. Using the method of optimal control, the paper derives the equilibrium time paths of both voting support and primary deficit in a dynamic model of finite time horizon under complete information. In case of both the variables, the opportunist and partisan budget cycles are found to follow a similar time pattern, albeit former is more pronounced than the latter just prior to the election time period. The citizen-voters vote for both – opportunist and partisan – incumbents; however, they reject the same when there is sufficiently strong anti-incumbency in the case of the opportunist incumbent. The level of voting support obtained in case of both – opportunist and partisan – incumbent is found to be positive and rising over time, but running the primary deficit higher than the threshold is costlier for the economy in the former case than in the latter. This implies that per unit votes garnered by raising the primary deficit in excess of the benchmark are lower when the incumbent is an opportunist than when she/ he is partisan.