Government ideology and fiscal consolidation: Where and when do government parties adjust public spending?

Abstract

Recent studies indicate that the ideological stances of government parties no are longer associated with differences in total government spending. At the same time, we observe that political polarization over spending policies has deepened. This paper addresses that puzzle by analyzing government spending behavior for ten expenditure categories during both ‘normal’ times and periods of fiscal consolidation between 1995 and 2015 for 16 OECD countries. Our results indicate that partisan motives prevail in ‘normal’ times: right-wing cabinets spend more on defense and less on education and environmental protection than left-wing governments. On the other hand, in periods of fiscal adjustment, differences between left- and right-wing government expenditures can be observed mostly in different budget categories. For instance, during fiscal consolidations, right-wing governments reduce spending more than their left-wing counterparts on those categories featuring large shares of public employee compensation (i.e., public consumption spending) and small capital-expenditure shares. Hence, a central message of this paper helping to resolve the aforementioned puzzle is that ideological differences remain important after taking a comprehensive look at individual spending categories and distinguishing between periods with and without adjustments.