Discretionary Fiscal Policy and Elections

Abstract

An early criticism of the Stability and Growth Pact has pointed to its asymmetric nature and the weak mechanisms to prevent politically-motivated fiscal policies: its constraints would bite in downswings but not in upswings, especially if in the latter the electoral cycle increases the temptation to run expansionary policies. We find that the experience of the initial years of EMU lends support to this criticism. Overall, unlike the experience in the run-up to EMU, fiscal policies had an expansionary bias, and a “genuine” discretionary boost took place in correspondence to political elections. Both sign and composition of such discretionary changes are in line with the predictions of the recent literature on electoral budget cycles. Closer fiscal surveillance may help detect early such behaviour, but it is unlikely to curb the incentives to run politically-motivated fiscal policies when elections approach ...