Political Budget Cycle and Government Payments

Abstract: The literature on political budget cycles points out that taxes and public deficits are adjusted to alternate fiscal expansions and consolidations according to the electoral cycle. The empirical evidence about public expenditure is controversial. In this paper, we provide an explanation for this puzzle that exploits the difference between expenditure commitments and payments, which characterizes government financial accounting. Relying on data from Italian municipal governments for the period 2000-2014, we find a political cycle in government payments. To detect the drivers of such cycle, we develop a new theory of political behavior featuring a trade-off between career concern and rent-seeking under uncertain politician’s productivity. The payment cycle allows the politician to privately refine his expectation about own productivity, thus relaxing the trade-off between rent-extraction and re-election probability. For this reason, term limits reduce the size of the payment cycle. Such theoretical predictions are confirmed by alternative empirical treatments which help us to exclude identification problems.