Conditional political budget cycles: The role of time preference

Abstract

AbstractWe revisit work that has indicated that the presence and strength of political budget cycles depend on a range of conditioning factors. We point to the importance of voter time preference and argue that, in relatively poorer countries, high discount rates will lead impatient voters to value immediate consumption due to fiscal expansions over the future benefits from fiscally responsible policies. Consistent with this assertion, our empirical evidence, based on a sample of up to 67 low‐ and high‐income countries over the period 1995 to 2016, indicates that budget cycles emerge in countries with a GDP per capita below a threshold of around 30,000 PPP‐adjusted constant 2017 U.S. dollars. This goes beyond previous explanations of budget cycles based on voters with short memories who underestimate the costs of expansionary policies, voters with little experience with democracy or voters who are poorly informed about the competence or policy preferences of political candidates.