Budget deficits and coalition governments

Abstract

This paper shows that compromise between different ideological motivations within multiparty governments may result in a bias toward running budget deficits even if all parties in the coalition prefer balanced budgets. The deficit bias increases with the degree of "polariz- ation" of the ideological motivations and generally decreases with the degree of concentration of power within the government. Although the analysis is conducted assuming a proportional representation electoral system, the results will also apply to majoritarian systems if the win- ning party comprises ideologically different constituencies. The relationship between budget deficits and multiparty governments is investigated using data from a sample of eight European Union countries for the period 1971-1990. Analysis on pooled data is partly in line with the theory. Time series within country analysis is less favorable: we find clear support to the theory only in the case of Italy.