Reid - Endogenous Elections, Electoral Budget Cycles and Canadian Provincial Governments PDF

Endogenous Elections, Electoral Budget Cycles and Canadian Provincial Governments
Author(s): Bradford G. Reid

Source: Public Choice, Vol. 97, No. 1/2 (Oct., 1998), pp. 35-48
Published by: Springer
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Public Choice 97:
35-48,
1998.
35
1998 Kluwer Academic Publishers. Printed in The Netherlands.
Endogenous elections,
electoral
budget cycles
and Canadian
provincial governments
*
BRADFORD G. REID
Department of
Economics,
University of
Alberta, Edmonton, Alberta,
Canada T6G 2H4
Accepted
10
April
1996
Abstract. The existence of
manipulative
electoral
budget cycles
and
opportunistic
election
setting
is examined in the framework of a
parliamentary democracy. Empirical
tests are con-
ducted
using
a
pooled
time series cross section data set derived from Canadian
provincial
governments
over the 1962-1992
period.
Evidence in
support
of the electoral
budget cycle
hypothesis
but not the
opportunistic
election
timing hypothesis
is obtained.
1. Introduction
The idea that
policy
choice
may
be influenced
by
the incentives
confronting
politically
motivated
policy-makers
has been an
important part
of the macro-
economic
policy
literature for the last
twenty years. Early
work
by
Nordhaus
(1975)
and MacRae
(1977)
developed
the notion of a
political
business
cycle
in which macroeconomic
policy
choice leads to a destabilization of the econ-
omy,
with election
cycles
in inflation and
unemployment.
While this
original
analysis
was based
upon
a framework in which
policy-makers attempt
to
improve
their chances of reelection in a world of
myopic
voters,
recent con-
tributions to the literature have focused on
policy
choice in the context of
rational,
forward-looking
voters. While
forward-looking
models do not
yield
the
simple political
business
cycle predictions
of the
early
literature,
they
are
nonetheless still
capable
of
generating
an electoral
impact
on
policy
choice as
evidenced
by
the electoral
budget cycle
results
arising
from the
asymmetric
information and
signalling by Rogoff
and Sibert
(1988)
and
by Rogoff (1990).
An
important
distinction between the newer and earlier literatures is that the
analyses
of Nordhaus and MacRae
predicted
electoral
cycles
in real variables
such as
aggregate output
or
unemployment
while the more
recently developed
signalling
literature
predicts
the electoral
manipulation
of
policy
instruments
*
Funding provided by
the Social Sciences and Humanities Research Council of Canada
for this
study
is
gratefully acknowledged.
The
helpful
comments of an
anonymous
referee
were also
appreciated.
36
such as
government spending, taxing
and
money growth (electoral budget
cycles
rather than electoral business
cycles).'
In
conjunction
with the theoretical literature a substantive
empirical
liter-
ature has also
developed
over the last
twenty years attempting
to determine
whether electoral business and/or
budget cycles
exist. The results from this
empirical testing
have been mixed. Political business
cycle
models
predict-
ing
electoral movements in
aggregate output
and
unemployment
have been
rejected
in
empirical
studies
by
Hibbs
(1987),
Alesina
(1988)
and Alesina
and Roubini
(1992). However,
these
negative findings
have been
challenged
by Haynes
and Stone
(1990). Empirical
evidence has been more
supportive
of
the electoral
budget cycle
with studies
by
Hibbs
(1987),
Alesina
(1988),
Bizer
and Durlauf
(1990),
and Alesina et al.
(1993)
generating
results consistent
with an
electorally-based manipulation
of
policy
instruments.
The
purpose
of this
paper
is to continue the
empirical investigation
of
the influence that
political
factors
may
have on
policy
choice. The
analysis
focuses on
testing
for the
possibility
of electoral
budget cycles
in which
policy
instruments are affected
by
the
timing
of elections. This research ex-
tends the
existing empirical
literature in several
ways.
First,
policy
choice
and electoral
timing
is examined for a set of sub-national
governments,
in
this case for the ten
provincial governments
in
Canada,
over a
thirty-one
year
time horizon
(1962-92 inclusive).
The combination of time series and
cross section data
generates
a
relatively large
number of observed election
periods.
The additional
degrees
of freedom that this affords
represents
an
improvement
over the
predominant
form of
empirical study
in this area which
has
typically
focused on the time series of a
single
national
government.
Pure time series studies
generate relatively
few observed election
periods.
One
study by
Alesina et al.
(1993)
has utilized a
pooled
time series cross
section data set for several OECD countries. While this
approach
adds more
observed election
periods
it does so at the cost of
introducing
more "noise"
to the
analysis through inter-country
constitutional and institutional
diversity.
The use of sub-national
provincial governments permits
the added
degrees
of freedom within the context of
very
similar constitutional and
policy
en-
vironments.
Second,
because Canadian
provincial governments operate
as
parliamentary
democracies,
the
empirical analysis
can address two
impor-
tant
policy
choice issues. Do incumbent
politicians
behave
manipulatively by
choosing
the behavior of
policy
variables over the electoral
cycle
to alter their
chances of reelection and do incumbent
politicians
behave
opportunistically
by strategically choosing
the
timing
of elections to
capitalize
on favorable
economic conditions? Third, since
monetary policy
choice is not a
provincial
government responsibility
in
Canada,the analysis
focuses on two fiscal
policy
instruments: revenue and
expenditure. Further, the
expenditure
instrument is
37
decomposed
into its constituent
parts
to determine whether the electoral
cycle
influences
purchases
of
goods
and transfer
payments differently.
2. Institutional
setting
and data
The Canadian
system
of
government
is a federal
system
in which there are ten
subnational
jurisdictions
or
provinces.2
Each
provincial legislature
is a
par-
liamentary democracy
which controls its own levels of
expenditure,
taxation
and
borrowing although
there are some constitutional limits on the
types
(not
the
magnitude)
of taxation that can be
employed by provincial governments.
Additionally, provincial governments
are linked to the federal
government
on
the revenue side
through
a
system
of federal
grants
to the
provinces.
Each
province operates
under a common constitutional framework but is
relatively
autonomous in the
setting
of its
expenditures
and revenues net of federal
grants.
The constitutional framework of
parliamentary democracy permits
the
use of
provincial
data to address the
question
of whether incumbent
political
parties
behave
opportunistically
when
choosing
the
timing
of an election
(which
is at least
partially endogenous
in such a
setting). Autonomy
in the
choice of
expenditures
and revenues allows the
analysis
of
provincial
data to
examine the
question
of whether incumbent
politicians
behave
strategically
in their choice of these
policy
variables in an
attempt
to influence electoral
outcomes or to
signal
the
"quality"
of their
government
to voters.
The variables to be used in
testing
for the existence of electoral
budget
cycles
are described in Table 1. Annual observations were
gathered
for each
of these variables over the 1962 to 1992 time
period.
This
generated
a
pooled
time series cross section data set with
thirty-one
annual time series observa-
tions on each of the ten
provinces
for a total of 310 observations. The use of
lagged
values in the
estimating equations
resulted in the "loss" of the 1962
and 1963 observations
reducing
the effective data set to 290 observations.
Of these 290 annual
provincial
observations,
76
correspond
to election time
periods.
Thus the
pooling
of time series and cross section data
provides
a
relatively large
number of observed election
periods.3
The data were assembled from several sources.
Income,
price
and
gov-
ernment
budget
data were obtained from the Provincial Economic Accounts
published by
Statistics Canada. Observations on the
unemployment
rate came
from The Provincial Economies
published by
the Conference Board in Canada
and from Historical Labour Force Statistics
published by
Statistics Canada.
Population
estimates
came from
Estimates
of Population for
Canada and
the Provinces and from
Quarterly Demographic Statistics, both
published
by
Statistics Canada. Electoral data were obtained from the Canadian Par-
liamentary
Guide and the various electoral
reports published by
each of the
38
Table 1. Variable definitions
y
=
annual rate of
change
in real
per capita provincial
Gross Domestic
Product
UR
=
provincial unemployment
rate
7r
= annual rate of
change
in the
provincial
Gross Domestic Product
price
deflator
GGS
=
annual rate of
change
in real
per capita provincial government
current
purchases
of
goods
and services
TRP
=
annual rate of
change
in real
transfers to
persons (excluding
interest
payments
on the
public
debt)
TRB
=
annual rate of
change
in real
transfers to business
including
transfers to
agriculture
GI
=
annual rate of
change
in real
per capita provincial
fixed
capital
purchases
EXP = annual rate of
change
in the sum of the four real
per capita
expenditure
items listed above
REV = annual rate of
change
in real
non-
borrowed revenue net of federal
government grants
ELECDUM =
a
(0, 1) dummy
variable
indicating
the
presence
or absence of a
provincial government
election in
any year (0
for no
election,
I for
an
election)
PERSEAT =
percentage
of seats won
by
the
governing
or incumbent
political
party
POPVOTE =
percentage
of the
popular
vote won
by
the
governing
or incumbent
political party
MINORITY = a
(0, 1) dummy
variable
indicating
the
presence
or absence of a
minority government (0
for a
majority government, 1
for a
minority
government)
CHANGE =
a
(0, 1) dummy
variable
indicating
whether the current incumbent
party
is in its first electoral term
(1
if the current incumbent
party
is
different from the incumbent
party prior
to the most recent
election,
0
otherwise)
LEFT = a
(0, 1) dummy
variable
indicating
the
political
stance of the in-
cumbent
party (0
for "center" and
"right" parties, 1
for
parties
of the
"left").
Parties of the left were defined to be the New Democratic
Party (NDP)
and the Parti
Quebecois (PQ)
ELAPSE =
number of
years
since the last
provincial
election
provinces.
Because the
provincial
economic data are annual
observations,
it was
necessary
to "match" these in some
way
with the actual
timing
of
elections.
Following
the rule
applied by
Alesina et al.
(1993),
elections were
matched to the economic data
by associating
the
previous year's
data with
those elections
occurring
on or before 30 June and the current
year's
data
with those elections
occurring
after that date.
39
3.
Endogenous
elections
In
parliamentary
democracies the
timing
of elections is at least
partly
under
the control of the incumbent
political party.
Provincial elections in Canada
can arise
through any
one of three avenues.
Legislative
assemblies are limited
to a maximum term of five
years
and when this is reached an election must
be called. The
governing party
can confront a vote of non-confidence in the
legislature
(this
event most
likely
to occur when the incumbent
party
does
not hold the
majority
of seats in the
legislature).
Or the incumbent
party
can
petition
the
lieutenant-governor
as the
representative
of the crown to dissolve
the
legislative assembly
and
proceed
with an election. The third
option
is the
usually
observed mechanism
through
which a
provincial
election occurs and
is a
process
that
provides
the incumbent
party
with some
ability
to choose
the
timing
of elections. The
opportunistic
exercise of this
authority gives
the
incumbent
party
the
ability
to enhance its chances of reelection
by influencing
the
timing
of an election.
This
potential endogeneity
of elections raises the
possibility
that there
may
be a correlation between the
timing
of elections and the behavior of economic
variables if
stronger
economic
performance
is viewed
by
the incumbent
party
as
being
favorable to its chances of reelection.
Thus,
parliamentary
democ-
racies could exhibit a
political
business
cycle
not because
politicians
are
actively manipulating
economic variables but rather because
they
are
reacting
passively
to those variables in
choosing
election
timing.
Ito and Park
(1988)
examined
empirically
the
endogenous
election issue for
Japanese
national
elections over the 1955 to 1986 time
period. They
found evidence in
support
of the view that
timing
of national elections in
Japan
was
opportunistically
chosen
by
the
governing party
to coincide with the
periods
of
higher
out-
put growth
and lower inflation. This result for
Japan
was reconfirmed in a
study by
Alesina, Cohen,
and Roubini
(1993)
that examined electoral
timing
for OECD
parliamentary
democracies over the 1960-1987
period.
However,
their
study
also found that this
Japanese
result in
support
of the
opportunistic
election
timing hypothesis
was not
replicated by
the data for
any
of the other
OECD countries in their
analysis.
To derive a
relatively simple
test of the
endogenous
election
hypothesis,
assume that the
probability
of
calling
an election
during any
time
period t,
defined to be
Zt,
can be described
by
the
following equation:
Zt
=
fo
+
f1
-
ELAPSEt
+
82
-
(ELAPSEt)2 + 83
"
MINORITYt
+ 04
-
LEFTt
+
U
S
. POPVOTEt
+ i6 PERSEATt
+
D7 yt
+ 8s t-I + B9" URt + lloURt-1 + 1l nt + B12 t-1 + Et (1)
where each of the included variables are described in Table 1 and E is a ran-
dom disturbance term.
Equation (1)
is an
expanded
version of the
equations
40
used
by
Ito and Park
(1988)
and
by
Alesina, Cohen,
and Roubini
(1993)
in
their
empirical
tests of the
endogenous
election
hypothesis.
In this
specifica-
tion the
probability
of
calling
an election
depends upon
the time
elapsed
since
the
previous
election
(to
allow for the constitutional term limit of five
years),
upon
a set of
political
variables
measuring
the
political
stance of the incum-
bent
party
and the
strength
of its mandate from the
previous
election,
and
upon
a set of
aggregate
economic variables. If favorable
aggregate
economic
performance
is viewed as
enhancing
the chance of incumbent
reelection,
then
the
probability
of an election
being
called should rise when "better" eco-
nomic
performance
occurs,
everything
else held
equal.
Thus,
the
endogenous
election
hypothesis
with its
opportunistic politicians
would
predict
that the
coefficients attached to the
aggregate output growth (07
and
P8)
should be
positive
and those attached to the
unemployment
rate and to the inflation rate
(P9, P10,
1Pl
and
812)
should be
negative.
To test the
predictions
of the
opportunistic endogenous
election
hypothesis
equation
(1)
was estimated
using probit analysis
with the election
dummy
variable
(ELECDUM
described in Table
1)
as the
dependent
variable. The es-
timation used the
pooled
time series cross section
provincial
data set with the
pooling being
achieved
by "stacking"
the time series data from each
province
into a
panel regression.
In addition to the variables
specified
in
equation
(1),
the estimation
employed
a set of
(0, 1)
provincial
dummies to allow the con-
stant term to
vary cross-provincially.
Estimation was
accomplished using
the
probit
estimation
technique
of the SHAZAM
computer program.
The results
of that estimation
process
are
presented
in Table 2.
As Table 2 indicates the
only
two
parameters
of the estimated
probit equa-
tion that are
statistically
different from zero at standard levels of confidence
are those attached to the
squared
time since
previous
elections variable and
the
minority government variable.4
Both of these estimated
parameters
are
positive indicating
that as time
elapses
since the
previous
election the
proba-
bility
of
calling
an election rises
non-linearly
(as
is to be
expected given
the
five
year
term
limit)
and that the existence of a
minority government
raises
the
probability
of an election call. These
empirical
results do not
support
the
hypothesis
that incumbent
politicians opportunistically
set election dates in
response
to favorable economic conditions. None of the
aggregate
economic
performance
variables have estimated coefficients that are
significantly
dif-
ferent from zero and most of these estimated
parameters
are
opposite
in
sign
to what the
endogenous
election
hypothesis
would
predict.
Thus,
the
empir-
ical results
generated
from Canadian
provincial
data are
broadly
consistent
with those obtained
by
Alesina, Cohen, and Roubini
(1993)
in their
study
of
several OECD countries.
41
Table 2. Probit estimates of election
timing
(t-values
in
parentheses)
Independent
Estimated
variables coefficients
ELAPSE -0.437
(0.71)
(ELAPSE)2
0.312
(2.67)**
MINORITY 0.850
(1.65)*
LEFT -0.214 (0.54)
POPVOTE -0.017
(0.53)
PERSEAT 0.001
(0.09)
y
-0.048
(1.41)
y(-1)
-0.001
(0.02)
UR 0.007
(0.06)
UR
(-1)
-0.058
(0.55)
7r 0.001
(0.05)
n(-1)
0.014
(0.49)
# of observations
=
290
Craig-Uhler
R2
= 0.637
Percent correct
predictions
=
87.9%
Log-likelihood
ratio test statistic
(slope
coefficients)
=
165.9
X2 (21)
*Significantly
different from zero at the
90% level of confidence.
**Significantly
different from zero at the
95% level of confidence.
4. Electoral
budget cycles
Early political
business
cycle
models
generated electorally
related
cycles
in
aggregate output, unemployment
and inflation as incumbent
politicians
at-
tempted
to
gain
reelection
by altering
the welfare of
myopic
voters
during
election
periods.
In contrast to this
approach
the more recent literature has
focused on
rational,
forward-looking
voters and
politicians
imbedded in a
world of
asymmetric
information. In models
developed by Rogoff
and Sibert
(1988)
and
Rogoff
(1990)
incumbent
politicians
use fiscal and/or
monetary
instruments to
signal
their individual
"competence"
to an electorate for whom
politician type
is not
directly
observable. These movements in
policy
instru-
ments at election times
generates
an electoral
budget cycle.
For
example,
Rogoff (1990) predicts
that
prior
to an
election,
incumbent
politicians
will
reduce taxes and
expand government consumption expenditures
as a
signal
42
of their
competence
to voters. Since more efficient
politicians
can
generate
larger "surpluses"
that can be distributed to voters these electoral
budget sig-
nals are sufficient to enable voters to
distinguish competent
from
incompetent
incumbent
politicians.
To ascertain whether electoral
budget cycles
exist it is
necessary
to deter-
mine whether
policy
instrument behavior is related to the
timing
of elections.
This
study
focusses on the fiscal
policy experience
of the ten
provincial gov-
ernments
in Canada. Six measures of fiscal
policy
are utilized. Data were
gathered
on annual rates of
change
in
real,
expenditures
on
goods
and
services,
transfers to
persons excluding
interest
payments
on the
public
debt,5
transfers to business
including
transfers to
agricultural
firms,
and fixed
capital
formation. These four
categories
of ex-
penditures
were
aggregated
to obtain an annual rate of
change
in real
per
capita
"total"
discretionary expenditures.
In addition to these five
expendi-
ture
instruments,
data were also
gathered
on the annual rate of
change
in
real
non-borrowed revenue net of federal
government
transfers to the
province. Netting
out federal transfers leaves a
provincial
revenue measure that is determined
solely by provincial policy-
makers.
The
responsiveness
of these
policy
instruments variables to election
timing
is examined
by estimating equations
of the
following
form:
Xi,t
=
0
+
61
-
Xi,t-I
+
S2
"
Xi,t-2
+ 3
ji,t
+ 4 AURi,t
+
65 PERSEATi,t
+
66 POPVOTEi,t
+
87
MINORITYi,t
+ 88 CHANGEi,t
+
39 LEFTi,t
+
310 ELECDUMi,t
+
Vi,t
(2)
where X
represents
the
policy
instrument under
consideration,
the
right-hand-
side variables are as described in Table I with the
exception
of AUR which is
the
change
in the
unemployment
rate,
and v is a random disturbance term. The
subscript
"t"
denotes time and the
subscript
"i" denotes
provinces, reflecting
the
pooled
time series cross section data set utilized in this
study. Equation
(2)
hypothesizes
that several factors
may
affect the behavior of the
policy
instrument variables:
lagged policy
instrument behavior
(persistence),
current
economic conditions
(output growth
and
changes
in the
unemployment
rate)
and a set of
political
variables.
PERSEAT,
POPVOTE and MINORITY are
included to determine whether the "mandate" of the incumbent
party
influ-
ences the choice of fiscal
policy
at the
provincial
level;
CHANGE measures
the effect of first term
government
on
policy
choice; and LEFT allows for
the effect of a left-of-center incumbent
political party.
The election
dummy,
ELECDUM, enters to measure the electoral
cycle
effect on the fiscal
policy
instruments.
43
Table 3. Panel estimates of
policy equations (t-values
in
parentheses)
Dependent
variables
Independent
Goods Transfers Transfers Fixed Total Revenue
variables and to to
capital expendi-
services
persons
business tures
Dependent
-0.319**
-0.155** -1.148** -0.171**
-0.312** 0.144**
(-1) (6.01) (2.57) (2.56) (2.91) (5.92) (2.76)
Dependent
-0.203** 0.039 -0.074 -0.212** -0.180** 0.094*
(-2) (3.80) (0.67) (1.29) (3.57) (3.39) (1.82)
y
0.130
0.048 0.322* 0.553* 0.250** 0.634**
(0.66) (0.34) (1.72) (1.78) (2.50) (7.26)
AUR -0.363 0.922** 0.708 0.656 0.902** -0.375
(0.56) (2.04) (1.17) (0.58) (2.63) (1.39)
PERSEAT -0.284** -0.067 -0.114 -0.096 -0.068* -0.042
(2.89) (1.13) (1.54) (0.69) (1.63) (1.36)
POPVOTE 0.520** 0.012 0.135 0.326 0.161 0.113
(2.37) (0.09) (0.85) (1.00) (1.59) (1.57)
MINORITY 0.444 -1.995 -1.145 -8.208** 1.341 -1.210
(0.157) (0.91) (0.44) (1.93) (1.07) (1.25)
CHANGE 2.882* 1.782* 2.915** -0.853 0.578** 0.051
(1.86) (1.644) (2.31) (0.34) (2.77) (0.09)
LEFT 3.615* 0.020 0.566 -6.051* 2.161** -0.871
(1.68) (0.01) (0.36) (1.72) (2.20) (1.09)
ELECDUM 1.260 1.796** 5.134** 6.216** 2.291** -1.752**
(1.13) (2.18) (4.74) (2.97) (4.65) (3.77)
BUSE R2 0.227 0.234 0.289 0.141 0.355 0.536
*Significantly
different from zero at the 90% level of confidence.
**Significantly
Equation (2)
was estimated as a
panel regression
with
twenty-nine
time
series observations for each of the ten
provinces (for
a total of 290 observa-
tions)
using
the
pooled
time series cross section estimation
algorithm
of the
SHAZAM
computer package.
This
estimating algorithm
allows the model to
exhibit both cross-sectional
dependence
and serial correlation as the
pool-
ing technique corresponds
to Kmenta's
(1986)
cross-sectionally
correlated
and time-wise
autoregressive
model.
Accordingly,
the estimation
process
al-
lows the
autoregressive parameters
to differ over the
provincial
cross-sections
and
permits
the errors to be
contemporaneously
correlated
among
the cross-
sections. Nine
provincial (0, 1)
dummy
variables were also introduced into
44
the
equation
to allow the constant term to
vary
across
provinces.
The results
of this estimation
process
are summarized in Table 3.
The
empirical
results described in Table 3 can be summarized as follows.
The annual rate of
change
in real
per capita provincial government expen-
ditures exhibits a
strong cyclical component moving upward
as
aggregate
output expands
more
rapidly
and as the
unemployment
rate rises. The out-
put
effect on these
expenditures
arises from the
procyclical
movement of
transfers to business and fixed
capital
formation. Transfers to
persons,
as
expected,
are sensitive to movements in the
unemployment
rate with the rate
of
growth
in these
payments rising
as the
unemployment
rate rises. Provincial
government
current
purchases
of
goods
and services exhibit no
statistically
significant
business
cycle sensitivity.
There is some weak evidence that the
size of the incumbent
party's
"mandate" has an influence on
expenditure
growth.
Increased
plurality
in seats
depresses
the rate of
growth
in real
per
capita expenditures
while increased
popular
vote
expands
it. All of the man-
date effect on total
expenditure
arises from the
impact
of
plurality
on the
current
purchases
of
goods
and
services,
with no
statistically significant
effect
on transfers or fixed
capital
formation. First term
governments
have
higher
annual rates of
change
in
expenditures
than do
longer
lived
governments
in all
expenditure categories except
fixed
capital
formation. Left-of-center
governments
have a
higher
rate of
growth
in total real
per capita expenditures
than do center or
right-of-center governments
and a different
compositional
impact
on
expenditure
with a
higher
rate of
growth
in current
purchases
of
goods
and services and a lower rate of
growth
in fixed
capital
formation. On
the non-borrowed revenue side of the
budget,
the
strong procyclical
effect of
aggregate output growth
on revenue
growth
is the
only statistically significant
cyclical
or
political
effect,
except
for the election
year dummy.
Both real
per capita expenditure
and non-borrowed revenue
growth
are af-
fected,
in a
statistically significant way, by
the
timing
of
provincial
elections.
As
predicted by
the electoral
budget cycle hypothesis,
the occurrence of an
election is associated with
stronger expenditure growth
and weaker revenue
growth
than would occur in a non-election time
period.
On the
expenditure
side,
elections have a
significantly positive impact
on the annual
growth
of
transfers to
persons,
capital
formation but not
on current
purchases
of
goods
and
services.6 Thus,
the
empirical
evidence
obtained from
examining
Canadian
provincial government expenditures
and
revenues
provides strong support
for the view that the
timing
of elections has
a
significant impact
on fiscal
policy
instruments.
One
problem
that
may
arise with the
preceding analysis
is that the use
of an electoral variable to account for the effect of election
timing
on
policy
choice
provides
a rather narrow avenue
through
which these effects can oc-
45
Table 4. Panel estimates of
policy equations (t-values
in
parentheses)
Dependent
variables
Independent
Goods Transfers Transfers Fixed Total Revenue
variables and to to
capital expendi-
services
persons
business tures
Dependent
-0.322* -0.126**
-0.101* -0.179**
-0.299** 0.131**
(-1) (6.14) (2.08) (1.74) (3.11) (5.67) (2.47)
Dependent
-0.199** 0.054 -0.042 -0.190** -0.162** 0.081
(-2) (3.79) (0.93) (0.72) (3.25) (3.02) (1.55)
y
0.086 0.061 0.218 0.682**
0.262** 0.666**
(0.45) (0.42) (1.14) (2.26) (2.59) (7.47)
AUR -0.442 -.691** 0.206 0.881 0.858** -0.420
(0.71) (1.98) (0.39) (0.79) (2.52) (1.55)
PERSEAT -0.280** -0.056 -0.086 -0.082 -0.058 -0.049*
(2.80) (0.92) (1.14) (0.59) (1.32) (1.62)
POPVOTE 0.533** 0.027 0.134 0.315 0.141 0.129*
(2.38) (0.19) (0.80) (0.976) (1.36) (1.79)
MINORITY 0.408 -1.507 -0.143 -8.198* 1.001 -1.480
(0.14) (0.68) (0.06) (1.87) (0.78) (1.56)
CHANGE 3.007** 1.762* 3.211** -0.064 0.892** -0.112
(1.93) (1.61) (2.52) (0.03) (2.15) (0.20)
LEFT 3.731* 0.120 0.110 -6.949** 2.351 -1.201
(1.76) (0.08) (0.07) (1.98) (2.39) (1.48)
ELECPROB 2.406 3.214** 7.274** 14.317** 3.669** -1.382**
(1.382) (2.47) (4.39) (4.67) (4.489) (1.92)
BUSE R2 0.228 0.255 0.309 0.178 0.357 0.553
*Significantly
**Significantly
cur. The on-off nature of a
dummy
variable
may
not
capture
the
potentially
"continuous"
impact
that elections
may
have on
political decision-making.
In
a
parliamentary democracy
an election would
conceivably
occur in
any
time
period
with the
probability
of its occurrence
rising
as the
legislative
term
approaches
its five
year
limit. One
way
this
continuity
can be
incorporated
into the
analysis
is to utilize the
probability
of an election rather than the
occurrence of an election as the
explanatory
variable to
capture
the effect of
election
timing
on the fiscal
policy
instruments. The
impact
of this
change
is
reported
in Table 4 where the
(0, 1)
election
dummy
has been
replaced
as an
explanatory
variable
by
ELECPROB,
the
probability
of an election
occurring
46
in
any
time
period.
The
probability
of an election is obtained from the fitted
values of the
probit regression equation reported
as
equation (1)
above.
The
empirical
results summarized in Table 4 confirm the conclusions drawn
from Table
3,
with election
timing
as measured
by
the
probability
of an elec-
tion
occurring exerting
a
statistically significant impact
on both
provincial
government expenditures
and revenues. As the
probability
of an election in-
creases real
per capita expenditures grow
at a more
rapid
rate,
everything
else held
constant,
and revenues
grow
at a less
rapid
rate.
Again,
on the ex-
penditure
side,
election
timing
does not
significantly
influence current
goods
and services
purchases
but does affect transfers to
persons
and fixed
capital
formation.
5. Conclusions
The
political
business
cycle
literature has advanced the
proposition
that,
in
a democratic
environment,
policy
instrument behavior
may
be related to the
timing
of elections. This
paper
has focused on two
ways
in which such a
relationship may
arise. Incumbent
politicians may actively manipulate
the
pattern
of economic
performance (political
business
cycles)
or the
pattern
of
monetary
and fiscal
policy
(electoral budget cycles)
over the electoral
cy-
cle in an
attempt
to enhance their chances of reelection.
Additionally,
in a
parliamentary democracy,
a correlation between economic
performance
and
election
timing
could arise from the
opportunistic setting
of election dates
by
incumbent
politicians seeking
to
go
to the
polls
under favorable economic
conditions.
This
empirical study
has utilized observations on Canadian
provincial
government
elections,
economic
performance
and fiscal
policy
choice to test
for the existence of
opportunistic
election
setting
and
manipulative
electoral
budget cycles.
The
pooled
time series cross section data set affords a rela-
tively large
number of observed elections with which to conduct the
empirical
analysis.
The basic conclusions that can be drawn from this
analysis
are fa-
vorable to the electoral
budget cycle hypothesis
but not to the
opportunistic
election
setting hypothesis.
Economic
performance,
as measured
by aggre-
gate output growth, unemployment
rates and inflation
rates,
does not
appear
to influence the
timing
of
provincial
elections over the 1962-1992
period.
However,
over the same time
period, provincial government expenditures
and non-borrowed revenues do exhibit an electoral
pattern
with
expenditures
growing
more
rapidly
and revenues less
rapidly during
election
periods
than
during
non-election
periods.
The more
rapid growth
in
expenditure during
election
periods
arises from an
expansion
of
growth
in transfers to
persons,
capital
formation but not from
purchases
of
47
current
goods
and services.
Thus,
elections have a differential
impact
on the
components
of
provincial government expenditure.
Notes
1. It should be
recognized
that
signalling
models are also
capable
of
generating electorally-
related movements in
aggregate output
and not
just
in fiscal and
monetary policy
variables.
See Persson and Tabellini
(1991)
for an
example
of this.
2. These are: British
Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec,
New
Brunswick,
Nova
Scotia,
Prince Edward Island and Newfoundland.
3. This contrasts
sharply
with the
pure
time series studies of a
single
national
government.
For
example,
Ito and Park
(1988) examined
electoral
cycles
in
Japan
over the 1955 to
1986
period during
which there were twelve
general
elections.
4. The overall
"significance"
of the
regression equation
is indicated
by
the
reported log-
likelihood ratio test with the null
hypothesis
that all
slope
coefficients are zero. The
computed log-likelihood
ratio of 165.9 leads to the
rejection
of the null
hypothesis
at
all standard levels of confidence.
5. Interest
payments
on the
public
debt are excluded because the
magnitude
of these
pay-
ments in
any
time
period
is not
discretionary
but rather reflects
past
fiscal decisions and
current
exogenous
interest rates.
Additionally,
these
payments
are not
necessarily
made
to the residents
(voters)
of the
province
as most such debt is
externally
held.
6. These results could be
interpreted,
at least
partially,
as
being
inconsistent with
Rogoff
(1990)
whose
analysis
derived the
prediction
that
pre-electoral signalling
should lead to
an increase in
government consumption (or transfers)
and a decrease in
public
investment.
However,
such a conclusion
may
not be valid.
Rogoff's prediction
is obtained from his
assumption
that
government consumption
was a better
signal
than
public
investment be-
cause it could be observed more
easily by
voters than investment.
Thus,
his
analysis
is
really
based
upon
a
decomposition
of
easily
and
not-so-easily
observed fiscal instruments
rather than one of
government consumption
and
public
investment.
Additionally,
much
of what is classified as current
purchases
of
goods
and services
may
in fact be
public
investment
(for example,
education and health
care).
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democracies.
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