The electoral origin of government spending shocks

Abstract

In this paper, I develop a theoretical framework for analysing the economic and political origins of government spending variations both across countries and time. I first build a model where economic and electoral outcomes are determined simultaneously and in which choices of government spending and taxation vary according to the ideology of the ruling party along a left-right spectrum. The model introduces heterogenous voters, parties, and repeated elections into a neoclassical macroeconomic framework. I then exploit the large variations in the domestic political environment, the business cycle, and fiscal policy stance since 1945 to identify the country-specific parameters of the model for twelve OECD countries. The model shows that an important part of the variance in government spending can be linked to the political sector for most countries studied (59% on average), and in particular for countries like the United States and the United Kingdom with (i) more political polarization and (ii) a high persistence in government ideology.