Elections and fiscal balances : European panel data

Abstract

Fiscal sustainability is the buzzword of our time, an emphasis on stretching the purchasing capabilities of every note or coin. As Malta looks to exercise its budget under a successive incumbent government, sworn in after the earlier elections, an age-old accusation towards the lingering party in power crops up. This is the claim that government attempted to fiscally manipulate voter behaviour to boost its re-election prospects. Indubitably, addressing such potential unethical proceedings would have positive implications towards the health of both the economy and the democracy. But first, this phenomenon must be proven to exist. This dissertation sets out to investigate the factuality of this claim through a cross-country, time-series evaluation of the behaviour of government deficits throughout the European continent, with a panel of the 27 current members of the European Union (EU) panned over a 26-year window, from 1995 to 2020, limited to the latest available data of some variables. Care was taken to include as many significant variables as possible to avoid omitted variable bias, critical in any econometric methodology, through an assimilation of the literature. Since fiscal deficit is a macroeconomic variable, the anticipated explanatory variables are virtually unlimited, giving rise to the need to apply a Least Squared Dummy Variable (LSDV) model. The secondary data was obtained from Eurostat, the World Bank, and the Database of Political Institutions for 2020 (DPI 2020), with the latter corresponding to political variables and the former two employed for macroeconomic data. One acknowledges that the conclusion posited by the results must be vetted with utmost scepticism, especially in light of the wider geopolitical events that bias the results. The interest in the field of political economy stems from the fact that local literature is lacking. One hopes that the study would inspire increased appeal. The results indicate that there was a period of learning and adjustment during the time frame studied, with a significantly negative impact on the fiscal balance in the year preceding a general election from 1996-2012, an effect which diminishes in consideration of the full sample. Additional insights obtained include an insignificant influence stemming from ideological direction of a ruling government or coalition, and a negatively significant effect from Gross Domestic Product (GDP) per capita. Further research in the field might need to include European countries with a significantly weak democratic inclination as well as evaluate the source of the perceived learning effect.