The role of the past in public policy: empirical evidence of the long-term effect of past policy and politics on the local budget balance

Abstract

The main focus of this paper is on the role of the past in budgetary policy and the impact of a multitude of relevant political characteristics on the local budget balance in a dynamic context. Although the importance of past policy was stated approximately 6 decades ago by Lindblom (Public Adm Rev 19(2):79–88, 1959), dynamic studies are relatively underexposed in recent literature on the budget balance at the local government level. The studies that do take into account the dynamics surprisingly do not focus on the past but treat it as a control variable. This paper exhibits the theoretical background of introducing past performance into the analysis. It is also noticeable that the dynamic studies thus far only test the partisan and the political budget cycle hypotheses. In the empirical part of this study, we add government fragmentation and government power to the dynamic analysis, and we look for both short- and long-term effects on the budget balance. In doing so, we test the impact of multiple political characteristics simultaneously on a dataset of all Flemish local governments for the period 1995–2017. The results from the dynamic panel analysis show that past performance is of importance, as are the electoral budget cycle and the power of the government. The importance of the government power for the budget balance is a new insight in dynamic research. As we focus on the long-term impact of the explanatory variables due to the dynamics, we avoid the underestimation of the impact of politics on the budget balance in the long run.