Etienne Farvaque, Ph.D., Economics, University of Lille 1, Batiment SH2 - Faculte des Sciences Economiques et Sociales, Villeneuve d'Ascq, 59655, France and Jérôme Creel, Ph.D., OFCE, 69, quai d’Orsay, Paris, 75340, France.
In this paper, we consider if extreme policies in terms of more polarized budgets can occur under the two following assumptions: (i) voter's preferences are skewed by the history of the budget structure, a fact that politicians can use to influence their probability of reelection and the policy of their successors, (ii) fiscal rules are imposed on the budget. The first assumption is now relatively common in Public Economics (see for example, Laffont and Tirole, 1993, chap. 9, 10), and has been empirically verified. The second assumption has been the focus of a huge literature since the European Union began to consider implementing a common currency. We explore several fiscal rules that are variations on two well-known rules: the now famous golden rule, as in the United Kingdom, where only interest rate payments can generate debt, and a balanced-budget rule. Theoretically, we build on Alesina and Tabellini (1990), Tabellini and Alesina (1990), and the recent elaboration on these by Matsen and Thøgersen (2007). The political arena is thus one with partisan politicians, the degree of partisanship being expressed in a different allocation of budget resources. In our setting, we consider politicians more or less inclined towards favoring infrastructure or operating expenditures. Such an assumption has recently found empirical support, e.g. by Veiga and Veiga (2007a, b). This partisanship use of budget, plus the assumption of voters getting used to some levels of public goods spending (habit effect) gives the incumbent an incentive to distort the allocation to try to lure more voters, thus boosting her re-election probability. Though Matsen and Thøgersen (2007) show that, in such a framework, the incumbent's optimal policy features both a more polarized allocation of the public resources and a debt bias, we verify if these results hold when the incumbent is confronted with fiscal policy rules. We notably aim to check if the strategic use of the debt bias exhibited by Persson and Svensson (1989) is still at work under such constraints. The paper is structured as follows. Section 2 sets up the model, while section 3 studies the influence of fiscal rules. Section 4 concludes and indicates directions for further research.