The Hard Business of Balancing Budgets: A Study of Public Finances in Seventeen OECD Countries

Abstract

During the past two decades growing public sectors and simultaneous slow economic growth have highlighted the role of deficit management as a central part of economic policies in modern democracies. Both economists and political scientists have emphasized the role of political institutions in public financial policies. This study contributes to this growing body of research by showing that: (1) during election years public deficits increase because governments refrain from raising taxes; (2) multi-party governments are no more prone to deficit problems than one-party governments but they are more likely to raise both public expenditure and revenue; (3) in achieving deficit reductions, one-party governments with decentralized labour markets emphasize expenditure cuts while multi-party governments with centralized labour markets raise taxes; and (4) as a consequence, the highest tax rates can be found in countries with centralized labour markets, especially if labour market centralization is combined with multi-party government.