Wednesday, June 26, 2013
C3.23 (Oudemanhuispoort)
This paper examines the extent to which partisanship conditions the reaction of fiscal policy to macro-economic shocks. We focus on the overall size as well as the composition of discretionary fiscal policy. The standard expectations are that parties on the left run bigger budget deficits during recessions than do parties on the right, and that the right tends to be fiscally more profligate than the left during economic upturns. Our expectation is that such partisan differences have narrowed over time as a consequence of internationalization, Europeanization and labor market dualization. More importantly, we expect heighted partisan conflict over the tax – spending policy mix during economic downturns, and especially, economic upturns. Whereas tax cuts ought to feature more prominently in the approach to fiscal expansion of left and, especially, right parties in recent times, reflecting the concerns of pivotal middle-class voters who increasingly depend on the value of assets (i.e., financial, real estate) to engage in credit-financed consumption, we hypothesize that left and right governments increasingly diverge in their approach to fiscal consolidation: we expect rightist governments to rely mainly on spending cuts to restore budget balance whereas we expect leftist governments to mainly increase taxes. We test these propositions on a panel of 24 OECD countries between 1980 and 2011.
