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Populist fiscal policy

Author:	Khemani, Stuti; Wane, Waly;	Collection Title:	Policy Research working paper ; no. WPS 4762
Country:	World;	Date Stored:	2008/10/27
Document Date:	2008/10/01	Document Type:	Policy Research Working Paper
Language:	English	Major Sector:	Education
Rel. Proj ID:	1W-Governance & Political Economy Research -- -- P060358;	Region:	The World Region
Report Number:	WPS4762	Sub Sectors:	Primary education
SubTopics:	Economic Theory & Research; E-Government; Parliamentary Government; Debt Markets; Public Sector Economics	TF No/Name:	TF039976-WORLD - INSTIT'NS TO MITIGATE FINAN. CRISIS. SOC. TENSION; TF090739-JAPAN
Volume No:	1 of 1

Summary: Political economy explanations for fiscal profligacy are dominated by models of bargaining among organized interest groups over group-specific targeted benefits financed by generalized taxation. These models predict that governments consisting of a coalition of political parties spend more than single-party regimes. This paper presents an alternative model-that of populist pressure on political parties to spend more on the general public good, financed by costly income taxation-and obtains the opposite prediction. According to this model, public spending and taxes are lower under coalition governments that can win elections more cheaply. Indeed, in order to win elections, coalition partners need to satisfy a smaller share of swing voters than does a single-party government that enjoys narrower support from its core constituency. A coalition government therefore spends less on the public good to capture the share of the swing vote necessary for re-election. Using data from more than 70 countries during the period 1970-2006, the paper provides robust supporting evidence for this alternative model.


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