The fiscal effects of political tenure

Abstract

We investigate how the tenure of ruling parties and coalitions shapes government spending through intra-governmental negotiations. We assemble a comprehensive dataset covering four decades and including both established and emerging democracies to develop a novel measure of accumulated tenure in office for ruling parties or coalitions since the establishment of democracy. Our measure reveals substantial variation in the political tenure of rulers who alternate in office and identifies a significant fiscal effect of political tenure. A ten percent increase in tenure raises government expenditure, measured as a percentage of GDP, by 0.23 percentage points and the deficit by 0.21 percentage points over 1972–2014. We outline a conceptual framework that accounts for the uncovered empirical relationship and suggest the relevance of a fading “honeymoon effect”, which revisits Olson’s argument on the dynamic effects of distributional coalitions. The older the ruling group, the more divisive the remaining policies to be implemented, which requires costly transfers in the form of public expenditure to maintain cohesion within the ruling group. Our findings contribute to the understanding of bargaining in democratic settings, showing how political negotiation shapes fiscal policy and the distribution of resources.