Dynamics of Political Budget Cycle

Abstract

The strategic manipulation of fiscal policy in the context of winning elections is a hotly debated issue in economics and political economy. This paper is a theoretical analysis of the manipulation of fiscal policy by an electorally motivated incumbent politician who derives utility from voting support and dis-utility from primary deficit. The incumbent could be one of the following two types: opportunistic or partisan. Using the method of optimal control, the paper derives the equilibrium time paths of both voting support and primary deficit by the incumbent in a dynamic model of finite time horizon under complete information. The level of voting support obtained in case of both types of incumbents is found to be positive and rising over time. Thus, the opportunistic and partisan budgetary cycles follow a similar time pattern, although the cyclicality in case of former is more pronounced than in case of latter in the period closer to the election year. Besides, an opportunistic incumbent is more likely to face rejection when there is sufficiently strong anti-incumbency. Thus, in case of anti-incumbency with opportunism, primary deficit and voting support fall over time. An opportunistic incumbent is also likely to find it costlier to run a primary deficit higher than a specified threshold level than a partisan one. This implies that per unit votes garnered by raising the primary deficit in excess of the threshold level are lower when the incumbent is opportunistic than when she/he is partisan. Numerical simulations corroborate these analytical results.