Cycles on public expenditure composition within the European Union

Casual observation of fiscal aggregates in developed economies detects current expenditure rising faster than capital expenditure in the run-up to elections with the reverse occurring soon after. We provide a rationale for these types of political budget cycles which is consistent with full information and self-interested politicians: current expenditure typically produces immediate political returns, while politicians are still in office and, investment expenditure needs a time span to generate political dividends. This paper provides an empirical application to test the existence of a political budget cycle on EU central governments’ expenditure data running from 1970 to 2001. We use the Pooled Mean Group Estimator technique to determine the empirical results