Essays on fiscal policy

Abstract

The present thesis is a collection of studies on fiscal policy making. It consists of three chapters. The aim of the thesis is to identify and analyse links between fiscal policy, economic outcomes and elections. In particular, the first chapter attempts to examine the most under-investigated channel of fiscal policy transmission that is the effect of fiscal policy on aggregate profits. The results suggest that both direct and indirect taxation tend to decrease profits, while on the expenditure side results clearly indicate that a rise in public investment will tend to increase profits. The second chapter, using the same set of fiscal variables, explores for a sample of developed and established democracies the possibility of electorally timed shifts in the level and composition of fiscal policy. The results indicate that electoral incentives can affect both the level and the composition of fiscal policy. A key finding is that incumbents try to “signal” their competence by decreasing in election year ‘visible’ government revenues in order to provide immediate economic benefit to voters, while capital expenditures, which may only be observed by voters with a lag, seem to decrease in the election year. Finally, the third chapter examines at the national level the impact of electoral manipulation of public investment and the composition of public spending on the incumbent’s re-election prospects. The empirical evidence shows that the manipulation of public investment around elections is not ‘punished’ at the polls because this cut is not ‘visible’ by voters.