State Fiscal Rules and Composition Changes in Public Spending before the Election

Abstract

Political budget cycle models have been widely tested, but few studies consider different institutional contexts and different categories of public spending. This article uses data on disaggregated expenditures to estimate the effects of balanced budget requirements on electoral cycles. Using data of American states from 1977 to 2008, the analysis finds that prior to gubernatorial elections, politicians are likely to shift public spending toward more salient categories, such as corrections, security, and welfare expenditure, and away from education expenditure. This finding is consistent with the prediction of Rogoff’s signaling model. Yet, such effects are only significant in states with weak and medium carryover restrictions and are dampened as carryover restrictions become more stringent. Thus, balanced budget requirements constrain politicians’ ability to shift spending across different categories. Without considering the balanced budget requirements, the effects of political budget cycles may be overstated.