Incentive Effects of Fiscal Rules on the Finance Minister's Behaviour: Evidence from Revenue Projections in Swiss Cantons

Abstract

Predicting available tax revenue accurately is a key step of scal policy. It has recently been shown that revenue prediction errors have a direct impact on scal decits. In the current paper we explore the relationship between the ideology of the nance minister and tax revenue projection errors and assess how the stringency of scal rules does alter this relationship. We use a panel dataset on 26 Swiss cantons over the period 1980-2007 as well as a new dataset on 99 nance ministers at the cantonal level. We nd a rather counter-intuitive positive relationship between the ideology of the nance minister and tax revenue projection errors in the sense that a more left wing nance minister produces relatively more conservative forecasts. We also nd that scal rules reduce the eect of ideology on tax revenue projection errors. These results suggest that left wing nance ministers need to curb decits relatively more in order to signal the same level of competence than a right wing nance minister to the voters. It also suggests that scal rules render the signal less informative to the voters and thereby reduce the incentive for left wing nance ministers to be more conservative in their projections.