The Causes Of Government Budget Deficits: An Empirical Reexamination Of Partisan and Institutional Effects

In this paper I 1) reexamine Nouriel Roubini and Jeffrey Sachs' findings regarding the political causes of government budget deficits, and a revision of those findings by Per-Anders Edin and Henry Ohlsson; and 2) revise and extend another model of budget deficits by Robert J. Franzese, Jr. Roubini/Sachs find that “weaker” governments, meaning large coalition and minority governments, are positively related to budget deficits, whereas Edin/Ohlsson, using Roubini/Sachs' data, find that only minority governments are so related. Using the same models, but correcting coding errors in R-S's political variables and using a more accurate measurement of the dependent variable, I find that both authors' results change: Large coalition governments do run higher deficits, while minority governments do not contribute much to deficits. Franzese, using a much larger data set (which encompasses that of R-S) finds a much more subtle and varied pattern of political variables' effects on deficits. I extend Franzese's model by adding two variables, minority government and bicameralism; I use a more appropriate specification of the number of parties in government (which changes several related measures); and I test different specifications of the number of parties in government. These tests suggest that-in contrast to most of the literature, which views minority governments as weak--that minority governments do not increase deficits any more than other types of government, and can even be associated with deficit reduction. The finding is consistent with Tsebelis' hypothesis that 1-party minority governments are functionally equivalent to 1-party majority governments. I also find that bicameralism under ideologically congruent houses has no effect on deficits. Despite the considerable research already devoted to the study of deficits, much work remains to be done. Introduction During the 1970s and 1980s, large budget deficits and public debt levels emerged in most of the advanced industrial countries, after a period of relatively low deficits during the 1960s and early 1970s. Many studies, especially over the last decade, have focused on the potential political causes of these deficits. They ask, as put succinctly by Alesina and Perotti (1995), What accounts for the within-country difference in performance over time? and, Why have some countries incurred much higher deficits than others? A number of hypotheses about political influences on deficits have been advanced: Does the number of parties matter, and under what conditions? Does bicameralism make a difference? Is there a systematic difference in how minority governments perform vis a vis majority ones? How do one-party governments and multi-party governments (of both the minority and majority type) perform? In Part I of this paper, I reexamine and revise Nouriel Roubini and Jeffrey Sachs' (hereafter, R-S) widely cited findings (1989a, 1989b) regarding some of these political causes of government budget deficits, and a revision of those findings by Per-Anders Edin and Henry Ohlsson (hereafter, E-O) (1990). I show that both R-S's and E-O's conclusions are sensitive to 1) corrections in coding in R-S's original variables and E-O's more sensitive specification; and 2) to a more accurate measure of the dependent variable, the change in debt/GDP of central government. In Part II I compare these results with those from a study by Robert J. Franzese, Jr. (1996) which uses a much larger data set, encompassing R-S's both theoretically and empirically, using additional relevant variables,