Political cycle and fiscal policy in the countries of the European Union

Abstract

The efforts of politicians in power to affect the decisions of voters through expansive fiscal policies in pre-election periods are still topical. This article determines whether governments in European Union countries initiate the political-budget cycle. We analyse 23 EU member states in the period 1995–2008. We pay attention to four institutional factors that can contribute to the creation of the political-budget cycle: length of democracy, type of parliamentary election, term of election and ideology. We find that the political-budget cycle was present throughout European Union countries in this period. The factor of the length of democracy had a small impact on the statistical significance of the results. However, ideology turned out to be the most important factor in our analysis. Current revenues were used as a tool of fiscal policy in the years of elections predominantly by ideologically mixed governments. Left-wing governments used rather the expenditure side of the budget to win the favour of the electorate. The type of election (regular or early) became relevant only in specific cases and in combination with other institutional factors. Finally, the new EU member governments consider the spring or autumn term of the election as a criterion co-determining their pre-election fiscal policies.