Electoral competition and the dynamics of public debt : context-conditional political budget cycles

Why and under what conditions do governments borrow before elections? This thesis aims to shed light on this question by exploring governments' incentives that give rise to political budget cycles, i.e. fluctuations in the budget balance during election times, under different political, institutional, and economic contexts. The argument will be developed in three stages. First, the thesis will explain why politicians may choose to use debt strategically to win elections and discuss and evaluate different models that can explain political budget cycles. One model, a moral hazard type competence model is, as will be shown, particularly suited for this study. It will be extended in stages two and three. The second stage will look at the benefits and costs from public debt, with a particular emphasis on the likelihood of re-election (government popularity), party system polarisation, and sovereign risk. Sovereign risk increases the cost of borrowing and thus dampens the magnitude of political budget cycles; the effect of government popularity on strategic debt is conditional on the degree of polarisation. The third stage will take the motives to borrow as given and examine the effectiveness of debt as a strategic instrument. The less voters attribute responsibility for fiscal policy to governments, the less effective debt is as a strategic instrument. Economic volatility, regulatory density, and economic openness, this thesis argues, reduce this effectiveness and in turn the political budget cycle. Similarly, coalition government reduces responsibility associated with individual coalition partners, and thus the strategic value of public debt - yet this effect is moderated by the distribution of cabinet portfolios. The argument in this thesis is based both on formal models and on empirical, time series-cross sectional, analyses. It is arguably the most comprehensive treatment of political budget cycles and adds to an increasing literature on the contextual determinants of fiscal policy.EThOS - Electronic Theses Online ServiceGBUnited Kingdo