Political Budget Cycles in Latin America

Abstract

This study examines the relationship between elections and fiscal policies in Latin America during 2004–2019. We find that fiscal balance deteriorates and government expenditure increases during election years, confirming the existence of political budget cycles. Our generalized method of moments estimation suggests that governmental budget balance deteriorates between 0.6% and 0.8%, and government expenditure increases by 0.3%, during election years. Moreover, these political budget cycles are significantly larger in countries with high corruption levels than in those with low corruption levels. The difference can be explained by institutional factors. In our case, in countries with high corruption levels, possible rents for politicians are greater; hence, manipulating the fiscal tools before elections helps to maintain power.