Reelection incentives and political budget cycle: evidence from Brazil

Fabio Alvim Klein

doi:10.1590/s0034-76122010000200006

Abstract

This article tests the presence of political budget cycle (PBC) in municipal elections in Brazil and checks whether mayors who adopt such policy have greater probability of reelection. Based on fiscal and electoral data of 5,406 Brazilian municipalities and applying the difference-in-differences econometric method as well as logistic regressions, the results provide some evidence of PBC in Brazil, although its magnitude and consistency varies depending on the years used as electoral and non-electoral years. On average, reelectable mayors spend close to 3% more in election years than nonreelectables. Moreover, reelectables who do run for reelection present a variation in spending which is close to 5% superior to that of non-reelectables and non-runners. Additionally, the results suggest that mayors who increase public spending during electoral periods have greater chances of being reelected, as long as such spending is done within deficit limits acceptable by voters.

Highlights

Political budget cycle (PBC) is generally understood as an economic cycle caused by political motivations, and comes in many forms: through the increase in public spending, increase of employment, reduction in taxes, or even through moving spending from less visible public services to more visible ones (Drazen and Eslava, 2004, 2005; Eslava, 2005)
Based on fiscal and electoral data of 5,406 Brazilian municipalities and applying the difference-in-differences econometric method as well as logistic regressions, the results provide some evidence of PBC in Brazil, its magnitude and consistency varies depending on the years used as electoral and non-electoral years
The results suggest that mayors who increase public spending during electoral periods have greater chances of being reelected, as long as such spending is done within deficit limits acceptable by voters

Summary

Conclusions

This article sought to verify the presence of political budget cycle (PBC) in municipal elections in Brazil and tried to answer whether mayors who adopt such policy have greater probability of reelection as opposed to those who do not. The “change in composition” approach is even more justified in Brazil after the LRF was implemented in 2000, because its rules must have made it even more difficult for mayors to adopt the political budget cycle via an increase in total spending, even though they still seem to do so Another interesting finding is that the municipal PBC seems to be affected by state and federal electoral cycles, as indicated by the figures for 2002, an electoral year in Brazil for state governors, senators, federal deputies and the president. If there is such asymmetric dispute for budget resources during elections, it might well be enhanced in a context of federal decentralization and political fragmentation (e.g. coalition governments), as occurs in the Brazilian case, which together tend to promote an environment of fiscal indiscipline, making government spending to be above the optimal point of equilibrium (Eslava, 2006) In this sense, the implementation of fiscal and budgetary rules that restrict political interference, such as the LRF, seem welcomed. Verifying the relation between political budget cycles, quality and effectiveness of public spending, federalism and the size of government seems to be a promising research agenda for answering these questions

Introduction

Literature review

Empirical strategy

Descriptive statistics and tests

Econometric results