Political Factors Behind Cuts and Surges in Government Spending

Problems of Economic Transition
ISSN: 1061-1991 (Print) 1557-931X (Online) Journal homepage: http://www.tandfonline.com/loi/mpet20
Political Factors behind Cuts and Surges in

Government Spending
Konstantin Yanovskiy, Sergei Zhavoronkov & Kirill Rodionov
To cite this article: Konstantin Yanovskiy, Sergei Zhavoronkov & Kirill Rodionov (2017) Political
Factors behind Cuts and Surges in Government Spending, Problems of Economic Transition, 59:4,
294-320, DOI: 10.1080/10611991.2017.1321418
To link to this article: http://dx.doi.org/10.1080/10611991.2017.1321418
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Problems of Economic Transition, vol. 59, no. 4, 2017, pp. 294–320.
© Taylor & Francis Group, LLC
ISSN: 1061-1991 (print)/ISSN 1557-931X (online)
DOI: https://doi.org/10.1080/10611991.2017.1321418
KONSTANTIN YANOVSKIY , SERGEI ZHAVORONKOV, AND

KIRILL RODIONOV
Downloaded by [109.252.91.167] at 03:06 10 September 2017
Political Factors behind Cuts and Surges in

Government Spending
The Effects on Old Market Democracies and
Postcommunist Countries
Surges and cuts are explained here by some of the political factors affecting
governments’ abilities to balance the budget broadly discussed in the litera-
ture. The article focuses on territorial separatism, minority government,
grand coalition, single-party government, and the ruling party’s ideology.
Special attention is paid to the phenomenon of universal suffrage, which has
caused the rise to power of modern left-wing parties and strong special-
interest groups within the bureaucracy. Most political factors turn out to be
time- and case-sensitive except for universal suffrage. A severe crisis can open
the window of opportunity to cut public expenditure, while favorable eco-
nomic conditions stimulate claims for redistribution and spikes in government
spending. The most effective way to curb the instability of public finance is to
strengthen proreformist political coalitions, claiming defense of national
identity and moral values that encourage austerity and are market-friendly.
Keywords: weak government, Separatism, political competition, budget

deficit, universal suffrage, window of opportunity
Konstantin Yanovskiy is a senior research fellow at the Russian Academy of

National Economy and Public Administration. Sergei Zhavoronkov is a senior
research fellow at the Gaidar Institute for Economic Policy. Kirill Rodionov is a
research fellow at the Financial Research Institute.
294
PROBLEMS OF ECONOMIC TRANSITION 295
Why do some governments manage to balance the budget while others

fail? Episodes in the history of developed and transitional countries
provide material for case studies. The article focuses on political factors
of both rapid growth of and cuts in government spending. It also
examines the effect of political institutions on fiscal stability. It is
necessary to point out that case-study analyses may prove insufficient
in terms of reaching our research objectives. The reason is that these
factors, which often lead to changes in the size and scope of public
spending, tend to be in place for quite a long time before the measures
intended to cut or expand them are implemented (Benedicta Marzinotto,

cited in Ide and Park, 2015).
After a comparative analysis of the experiences of both old and new
market democracies, this article emphasizes key political factors that
have triggered changes in government spending patterns. Fiscal poli-
cies’ effects are measured by government spending and budget deficit
(both as a proportion of gross domestic product [GDP]), 1and comple-
ment the case studies with statistical comparative analysis.
Special attention is paid to the phenomenon of universal suffrage,
which has empowered modern left-wing parties and strong interest
groups within bureaucracy.
Literature review
Key political factors that trigger the rise of budget deficits and
government debt
Lizzeri (1999) proposed a theoretical model that explains the reasons
behind the accumulation of government debt in democratic countries.
According to this model, a politician who proposes to cut public
expenditure in order to curb a deficit is at risk of losing any forthcoming
elections. In turn, the electorate is not informed of the potential con-
sequences if the coalition that promises to reallocate financial resources
comes into power.
According to another hypothesis, a strong single-party government
(rather than a coalition government) is better able to balance the budget
and control the country’s debt (Roubini and Sachs, 1989a, 1989b).
However, the experiences of postwar Japan and the United States
(Hahm, Kamlet, and Mowery, 1995) cannot be appropriately used as
evidence of this hypothesis. The reason is that during the Cold War, the
296 PROBLEMS OF ECONOMIC TRANSITION
United States spent a substantial amount of its resources on protecting a

number of other states across the globe, including Japan. Consequently,
American allies were able to save billions of dollars that should have
been spent on building their defense potential.
Constitution, government structure, and ability to balance the budget

According to William Heller (1997), a bicameral structure of the legis-
lature complicates the balancing of the budget, as it multiplies the
number of interest groups involved. The proof is in the results of a
statistical analysis of the fiscal policies of seventeen democratic coun-

tries recorded between 1965 and 1990.
Falcó-Gimeno and Ignacio (2011) analyzed the fiscal policies of
governments that were led by minority parties. Such governments are
compelled to cooperate with the opposition on most budget issues, and
consequently, they have virtually no chance to control the deficit. If the
opposition is represented by a single party that has a significant chance
of winning the coming election, it has an incentive not to expand the
deficit. Otherwise it would be forced to curb the fiscal crisis as a ruling
party. However, if the opposition is fragmented, a minority party has
less chance to control the deficit.
Constitutional limitations of debt and budget deficits

Ghiglino (2000) did not analyze any actual attempts to introduce con-
stitutional norms that could limit budget expenditure, nor did he differ-
entiate the taxpayer experience from universal suffrage democracies. He
developed a theoretical model that measured the government’s ability to
impose a lump-sum tax on all citizens in order to increase public
expenditure and avoid having to save public funds, leaving the con-
sequences to future generations.
In reality, the conditions of a universal suffrage democracy lead to an
increase in government debt, and often lower taxes as well. Moreover, it
is very easy to form a coalition of politicians who will demand lower
taxes rather than government expenditure. Consequently, constitutional
norms are not an effective barrier to check the desire to increase
government expenditure by expanding the country’s debt.
The experiences of the Reagan and Bush Jr. administrations reveal
how popular measures intended to lower taxes can be in lieu of mea-
sures to lower public expenditure. It is important to note that while the
Reagan administration increased the defense expenditures that were

drastically cut after the Cold War, the Bush administration’s fiscal
policy was based on populism alone (called “Starving the Beast” in
Niskanen, 2006; Firey and Slivinsky, 2014).
Blume and Voigt (2013) researched the effect of constitutional rules
on budget and fiscal policy. In particular, they examined the norms that
allow for the transparency of fiscal policy and that limit the scope of
debt and deficit. They also took into consideration the duration of the
execution of rules that limit debt and deficit. Another variable they
considered was the longevity of the democratic rule that affected the
transparency of fiscal policy and they also took into consideration the
Maastricht criteria that are used in the European Union (EU). Finally,
Blume and Voigt considered legal systems as yet another variable.
Those governments that use the German legal system often introduce
norms that limit the size of their expenditure. While the Scandinavian
legal system correlates positively with the transparency of the budget
process, the French legal system correlates with it negatively. The
socialist legal system correlates neither with the limitations of the
government expenditures nor with the transparency of the fiscal process.
Blume and Voigt concluded that the constitutional norms that were
implemented in a number of countries in the 1990s and 2000s allowed
these countries to reduce public expenditure. They also concluded that a
country’s budget transparency correlates positively with those world-
wide governance indicators that focus on government effectiveness and
the control of corruption.
It is important to note that those members of the EU that ensure that the
Maastricht criteria are met do not provide a more conservative fiscal
policy than any other old market democracy. At the same time, this
variable correlates positively with the burden of the state on the economy.
In the 1830s and 1840s, the U.S. government faced a shortage in fiscal
revenue. At the same time, officials wanted to complete more and more
infrastructure projects in order to demonstrate their economic success.
This is why they were compelled to finance them by borrowing the funds
they needed. This, in turn, led to a number of budget crises that ultimately
caused a series of defaults (Dove, 2012). It forced the majority of state
governments to introduce constitutional norms that limited the size of the
debt and deficit, and that complicated the borrowing procedure.
Since 1936, the United States has seen a number of attempts to
introduce a constitutional norm that could limit the size of the federal
debt. However, all such attempts have failed. Moreover, all attempts to
implement old and introduce new balanced budget requirements
between 1961 and 2006 also led to failure. The evidence is provided
by Mahdavi and Westerlund (2011).
Ideological cleavages and fiscal policies’ outcomes

A substantial body of literature has focused on the search for evidence
of the insignificance of differences between the fiscal policies of left-
and right-wing governments.
This is why it is important to take into consideration studies that

demonstrate the differences between the fiscal policies of left- and
right-wing parties. One example is a study on the fiscal policy of
the United Kingdom authored by Kollias, Papadamou, and
Psarianos (2014). They analyzed quarterly statistics on government
revenues and expenditures from 1961 to 2011. Their conclusion was
that Conservatives were always trying to balance the budget, while
Labour was typically indifferent to the issue of budget stability.
At the same time, some factors have contributed to the lack of
differences between the fiscal and budget policies of left- and right-
wing parties. Thus, the political caution of the German Social
Democrats helped them to maintain a conservative fiscal strategy.
Another example is Sweden, where the Social Democrats were domi-
nant throughout the second half of the twentieth century: they consid-
ered the country as their political and corporate asset, which is why they
implemented a responsible fiscal policy.
In this regard, it is instructive to recall the 2012 U.S. vice-presidential
debate between Republican Paul Ryan and Democrat Joe Biden.2 Biden
cited the letter Ryan had sent to him in order to lobby for the provision
of funds from the federal budget that had been allocated for the purpose
of curbing the crisis in Wisconsin.
This is a clear illustration of the fact that conservative politicians who
seek reelection are often compelled to strive for the allocation of budget
resources for their voters, although this contradicts political principles
based on the idea of a limited government. Voters could lose money as a
result of this decision, which would make any budget priorities even
less fair. The other side of the coin is that it is difficult for conservative
politicians to cut those social programs that they have lobbied for
themselves.
Experience of budget consolidations

Alesina and Perotti (1996) reviewed several cases of financial stabiliza-
tion (the decrease in the public debt was their criterion). In particular,
they compared financial stabilization cases in Ireland (as a positive
example) and Denmark (as a negative example) in the 1980s.
The authors concluded that efficient stabilization should be based on
the reduction of expenses—namely, transfers and the income of public
employees—rather than on a tax increase. On the other hand, paying a
tribute to Keynesianism, the authors did not recommend reducing public
investments.
Budget deficit consequences: Deficit and economic growth

Goulas and Zervoyanni (2013 demonstrated that the evidence of the
relationship between deficit and economic growth is ambiguous, despite
multiple research studies and literature on the subject. In fact, some
researchers argue that there is a negative relationship between the two,
while others argue that there is no meaningful relationship as all. Based
on the analysis of the sample of twenty-seven EU member states from
1991 to 2007, the authors concluded that the unexpected increase in the
deficit, rather than the deficit itself, had a negative effect on growth.
It is noteworthy that a sharp increase in government deficit (espe-
cially when market agents do not see it coming) undoubtedly forces
investors to reevaluate the risks of their projects upward, and it ulti-
mately destabilizes economic growth. In addition, on many occasions a
sharp increase in the deficit may indicate preexisting negative tenden-
cies in the economy, undermining the state’s capability to collect taxes
(Goulas and Zervoyanni do not examine the direction of the cause-and-
effect relationship).
Country cases
All old democracies3 experienced an initial surge of state/public expen-
diture levels,4 which stemmed from the introduction of universal
suffrage.5 Later, however, these same countries experienced both spikes
in public expenditure and, less often, a decrease in public expenditure.
The following cases illustrate some of the typical political problems
associated in the literature with government’s failure to balance the budget.
Sweden: “Generosity” (1964 to 1983; 1991 to 1994) and austerity (1984

to 1990; 1996 to 2008)
The wide popularity of the “Swedish Model” of socialism remains both
long-term and stable, and the same can be said about the expenses of the
Swedish government from the start of the stabilization programs in 1984
and 1994, respectively (see Table 1). From the author’s point of view,
the following factors contributed to the country’s long-term prosperity:
● Lasting peace and well-rooted strong institutions that protect private

property and the proprietor. The Socialists, upon coming to power,

did not initiate nationalization (the opposite occurred in France,
England, Italy, and Austria);
● Benefits gained from the allied overseas powerful and free U.S.
economy, which encourages entrepreneurship and creativity
(Acemoglu, Robinson, and Verdier, 2012); and
● Long-term savings in military spending due to the defense “umbrella”
of the United States.
For a long time, the leadership of the Social Democrat Party (SDP)
viewed both the country and the state as a kind of “corporate asset” for
the party.6 The “long reign” caused a sense of responsibility for the
country and, at the very least; a responsibility for the states finances
(Santesson, 2013). The immediate impetus of stabilization programs
was inherited problems such as the budget deficit, inflation, and public
debt.
With regard to spending cuts, the consensus of all major political
parties is that those cuts are an important factor in the success of the
latest stabilization program (Edlund and Iju, cited in Ide and Park,
2015).
A moderate regulatory burden (Fraser Institute, 2015) could partially
balance heavy tax burdens of domestic businesses.7
Belgian spending expansion 1974 to 1981

Certain Flemish and Walloon parties began strengthening their position
from the end of the 1960s. The rise of separatism in Belgium caused a
series of reforms. The first state reform (establishing autonomous cul-
tural communities) was implemented in 1970. In the 1980s, this process
resulted in a reshaping of the party system, complete with the split of the
Table 1
Swedish Surges and Cuts
Central government Central

spending as share government deficit
Year Government (coalition) of GDP as share of GDP
1964 Erlander—SDP; 21.8 1.23

1965 Palme—SDP 23.7 1.81
Minority government (backed by
1966 25.0 1.82
Left Party—Communists of
1967 Sweden) 26.4 2.82
1968 26.5 3.14
1969 26.3 2.85
1970 26.3 3.04
1971 26.5 2.17
1972 28.2 2.93
1973 27.3 3.35
1974 28.2 4.17
1975 28.0 3.93
1976 Nonsocialist coalition majority 29.2 1.94
1977 government 31.9 3.57
1978 34.0 6.30
1979 Palme—SDP minority government 39.4 11.92
1980 (backed by Left Party— 36.0 9.51
Communists of Sweden)
1981 37.5 8.78
1982 37.4 9.12
1983 39.0 10.31
1984 Palme—SDP; Carlsson—SDP 37.4 8.15
1985 Minority governments (backed by 37.9 6.58
Left Party—Communists of
1986 Sweden) 34.0 4.19
1987 32.7 1.23
1988 30.3 0.30
1989 28.4 –1.13
1990 29.3 –0.24
1991 Nonsocialist coalition minority 30.3 1.97
1992 government backed by New 33.1 4.74
Democracy right-wing party
1993 39.2 11.35
1994 34.6
(Continued )
Table 1
(Continued)

1995 SDP Minority governments (backed 42.5 6.97

1996 by Left Party) 40.3 2.97
1997 38.2 1.16
1998 37.4 –1.06

1999 36.4 –1.12
2000 34.2 –3.53
2001 33.0 –1.83
2002 33.5 0.89
2003 33.5 0.91
2004 32.3 –0.38
2005 32.8 –1.52
2006 31.7 –2.09
2007 Non-SDP majority government 30.1 –3.42
2008 29.7 –2.28
SDP: Social Democratic Party.
leading left-wing and conservative parties into the respective

Francophone and Flemish parties.8
The second state reform (the establishment of Flemish and Walloon
territorial communities, as Brussels gained its full autonomy later) was
enacted in 1980. Communities and regions then received their indivi-
dual parliaments and governments.
According to the EFW, the increase in government consumption
amounted to about 2.5 percent, while transfers (redistribution) sky-
rocketed by 7.5 percent.
The same estimates show that the regulatory burden in the interim
hardly changed at all between 1970 and 1985 (from 5.7 percent to 5.8
percent, respectively), while the overall index of economic freedom
worsened slightly (from 7.8 percent to 7.3 percent, respectively).
Assessments were made every five years.
The country witnessed a gradual weakening of the central govern-
ment as a result of mounting separatism. Moreover, it experienced a sort
Table 2
Belgian Surge

1974 CVP/PSC, PVV, PLP (Christian 27.4 0.16

1975 Democrats and Liberals) 31.3 0.25
1976 31.5 0.30
1977 Government coalition principal 33.3 0.28

1978 change happened: CVP/PSC, 36.7 0.32
SP, PS and more—Socialist
1979 party replaced the Liberal party 37.2 0.32
1980 (PVV) in the Government 38.6 0.36
1981 42.6 0.57
1982 42.0 0.51
CVP/PSC: Christian People’s Party/Christian Social Party; PVV, PLP: Party for Freedom and
Progress; SP/PS: Socialist Party.
of societal split as the result of conflicting ethnic and linguistic aspects

of the main political parties. The relative weakness of the government
was in the transition to the new equilibrium (based on the ability of new
parties’ representatives to take responsibility for their decisions). In turn,
spending led to cost inflation as a means of maintaining the stability of
the government against the growing demands of interest groups.
However, during this period, the government remained quite stable,
and only a moderate fiscal deficit emerged (around 1 percent of GDP;
see Table 2). Apparently, the “recipients” fulfilled their obligations and
did not escalate the situation.
Belgium had a competitive business climate for the analyzed period,
but the situation has deteriorated significantly since the 1980s.
Japanese “lost decades” fiscal policy: From stimulating growth to budget

consolidation
Since the economic crisis of the early 1990s, the Japanese government
has launched a number of measures intended to stimulate growth.
Between August 1992 and December 2001, for example, officials
implemented thirteen anticrisis programs totaling ¥141.3 trillion ($1.2
trillion). More than two-thirds of these funds (71 percent) were invested
in the country’s small businesses and in the construction and farming
industries. The electoral base of the Liberal Democratic Party (LDP)
was concentrated in these industries, which is why the Cabinet decided
to invest in them. However, these fiscal measures were not very pro-
ductive: between 1992 and 2001, the average growth rate of the
Japanese economy amounted to 0.85 percent, after being 3.95 percent
between 1981 and 1990 (see Table 3).9
The low growth rates were evidence that the economy could not be
stimulated by fiscal incentives. The only way to return to growth was to

launch structural reforms, the basic idea of Junichiro Koizumi’s eco-
nomic program. Koizumi, who became prime minister in April 2001,
managed to cut the budget of the Fiscal Investment and Loan Program
(FILP) that accumulated Japan Post funds, as well as the resources of
private and state pension funds. These funds were deployed in the Trust
Table 3
Japanese Surge, 1970–1983
Government Central government spending Central government deficit

Year (coalition) as share of GDP as share of GDP
1970 Liberal 26.7 –3.82

1971 Democratic 27.6 –4.34
Party
1972 29.1 –4.87
1973 28.1 –5.71
1974 29.6 –5.07
1975 31.2 –4.32
1976 32.7 –4.67
1977 35.1 –4.89
1978 36.7 –5.25
1979 37.8 –0.86
1980 39.0 –0.13
1981 39.5 –0.39
1982 39.5 –0.74
1983 40.8 0.35
Note: The Liberal Democratic Party had perceived the country as a “corporate asset” during the
surge of spending period—similar to the Swedish Social Democratic Party and other cases of
“restricted” democracy.
Fund Bureau of the Ministry of Finance, after which they were loaned to
state companies that invested in construction and infrastructure projects.
Ultimately, Koizumi changed the way the FILP budget was formed.
Since 2002, it has been financed by the debt bonds issued on the open
market, and as a result, the FILP budget has become more transparent,
although it did contribute to the rise of Japanese debt. Moreover, the
FILP budget that amounted to ¥52 trillion in 1999 was cut to ¥32 trillion
in 2001 and to ¥15 trillion in 2006. Such a drastic cut was possible
thanks to the restructuring of eight state financial corporations that
distributed FILP funds: One of them was liquidated, two were priva-
tized, and five were united as one corporation.10
Furthermore, Koizumi managed to cut budget expenditures. Between
2002 and 2006, the Cabinet cut expenditures on defense, education, and
public works, as well as grants to municipal authorities. At the same
time, the Cabinet managed to curb the rise of social security expendi-
tures designed to support the aging population.
Koizumi also privatized and closed 136 state and quasi-state corpora-
tions, which allowed him to cut the budget by ¥1.8 trillion. Among those
privatized companies were four highway corporations, lobbied by the
LDP members.11 The Cabinet, furthermore, also cut the grants that were
allocated to the municipal authorities by ¥4.7 trillion. Finally, Koizumi
closed fourteen special budget accounts that accumulated ¥20 trillion and
that were governed separately from the general budget account.12
Overall, Koizumi’s attempt to consolidate the budget brought about
positive results. The budget deficit that amounted to 6 percent of GDP
in 2003 dropped to less than 3 percent of GDP in 2006. However, this
was merely a short-term success: in 2009, it rose to 9 percent of GDP.
Postsocialist countries reduced spending during the 1990s transition

slump
The history of the postsocialist transition period shows that the state and
public burdens on the economy do not occur, or are insignificant, when
the political and market institutions are strong. If these institutions are
weak, however, the public spending–GDP ratio falls dramatically, while
the budget deficit tends to increase as tax collection decreases at a faster
rate than the pressures on the expenditure side of the budget, which call
for redistribution. This point was reinforced by Dabrowski (1996,
Table 5).
The universal lesson of transition from socialism to a free market is

that it is easier to initiate structural reform when the country in question
is in the midst of a deep crisis. (The “good life” is difficult to restruc-
ture, as the reform target does not appear to be “in need of repair” from
the voter’s perspective.)
The transitional period’s important implication is the necessity to build
and to support a winning coalition for reforms. As the history of the
reforms proves, national pride and moral values are the crucial issues that
win the political battle for reforms, including financial stabilization.
To abandon national pride and moral values in public discussion to

antimarket forces was not just unreasonable, it turned to be quite
dangerous both for reform success in general and for government
capacity to balance the budget in particular.
These issues were hijacked by antimarket forces in Russia in the
1990s,13 which gravely complicated the situation. Antimarket nationalist
attacks inflicted severe damage on the reform cause. Gaidar singled out
Russia as a specific postimperial country affected by chauvinism, while
the rest of the postsocialist countries benefited from the collapse of the
Soviet Empire. Eastern European peoples perceived reforms as an inte-
gral component of the national liberation process (Gaidar, 2009; Mau and
Starodubrovskaya, 2001).14 and Russian reformists failed to repel the
chauvinistic assault.15 Antireformists’ political pressure weakened prop-
erty institutions in postimperial Russia and directly caused the 1998 crisis
(Dabrowski et al., 2004; Dabrowski et al., 2006; Gaidar et al., 2003).
The countries succeeding in balancing their budgets eventually
acquired more reasons for national pride and strengthened public mor-
ale, which had initially been harmed by high inflation and routinely
broken obligations (both by government and in private contracts
because of economic instability).
Latvia 2010 to 2013

Latvia is a remarkable example of a country that experienced a sig-
nificant reduction in spending yet balanced its budget with overall
success (see Table 4). (The deficit stayed below 1 percent of GDP for
three years.) However, the required political decisions were carried out
by the government and relied on a very specific body of voters.
On the one hand, Latvian universal suffrage grants voting power to
all descendants of the Republic of Latvia (1919 to 1940), citizens of the
Table 4
Latvian Cuts

2009 Coalition of conservatives, 43.42 9.0

2010 nationalists, and agrarians led by 44.00 8.1
prime minister Valdis
2011 38.83 3.3
Dombrovskis (conservative)
2012 36.54 0.8
2013 36.04 0.7
first republic, and citizens naturalized after 1991. On the other hand, the
Soviet colonists (1945 to the 1990s), who represent the least market-
adaptable stratum, are deprived of the right to vote.
Under normal circumstances, a strong sense of national identity will
not impede redistribution tendencies. However, in times of crisis, it will
facilitate the adoption of the unpopular measures that are required to
preserve and strengthen the national sovereignty of a small country. The
regulatory burden observed in Latvia (EFW, Heritage) is heavier than in
Estonia but quite competitive for the emerging markets.
Summary of country cases

The country case evidence: a severe crisis usually opens the window of
opportunity that is necessary to cut public expenditure, while the favor-
able economic conditions stimulate claims for redistribution and spikes
in government spending.
Another conclusion is that high tax pressure can be balanced to some
extent by a competitive business climate, preventing capital flight.
Eastern and Central European history corroborates Yegor Gaidar’s
hypotheses on the advantages of “nationalistic anesthesia” for market
reforms and specifically on spending cuts (see Table 2 in Supplemental
Materials—online only). The same is true of Koizumi’s leadership
(Nagy, 2014) and Thatcher’s 1983 elections in the UK when the
Conservatives started their manifesto out of “national pride” and just
after that promised reforms.16 In a few separate cases (established
democracies experienced in taxpayers, consensus democracy before

universal suffrage) there was a consensus by mainstream parties on
the necessity to cut spending (Sweden, Germany, United States).
Statistical analysis
Data and variables
For the purposes of evaluating the effect of universal suffrage on
government’s fiscal sustainability, the panel data period begins before
the introduction of this institution. The following variables are used in

our analysis.
Universal suffrage; Leftists (parties of “from cradle to grave” care
electoral support); central government spending as share of GDP; bud-
get deficit as share of GDP; public media (dominant in terms of political
news coverage). Boolean variables indicate government’s potential
strength or weakness: minority government; grand coalition govern-
ment; separatism; weak government (“true”—”1” if any of three pre-
vious is “1”— “true”); restricted (limited by Przeworski criterion)
democracy. A few variables are used for control: federal state; civil
law legal family’s (system’s) countries; great war; local wars; neutral
countries (neutrality periods); Japan dummy.
The variables and data sources are provided in the supplemental
materials (available online only).
Hypotheses tested
We analyze a series of hypotheses related to the influence of political
factors on surges in public spending as well as the budget deficit of
central government.
A strong government, as a rule, successfully balances the national
budget. There is a definitional problem here, however. Since the power
of the government can, to a certain extent, be evaluated through its
ability to balance the budget, there is a potential tautology involved: “A
strong government is a strong government” (because it manages to
balance the budget).
1. The authors have attempted to introduce certain indicators for a

better definition of a strong government through particularly nega-
tive definitions.
1.1. A minority government (including the U.S. administration,

which has no majority support in either House of Congress)
is obviously not a “strong government.”
1.2. The government of a “grand coalition” controls an impress-
ive majority of legislators on just a nominal basis, while the
latter is composed of ideologically heterogeneous, or even
hostile, factions. Thus, this form of government cannot be
defined as “strong” either.
1.3. A government facing the threat of separatism is, ceteris
paribus, weaker than governments that are not experiencing

similar difficulties.
1.4. Governments of democracies that are limited, with no real
power rotations for decades (postgeneration, twenty years or
even more), are expected to perceive the leadership of the
ruling party as the “corporate proprietor” of the country, and
are consequently more inclined to balance the budget. (This
stimulus disappears if the ruling party is no longer able to
win the election.) The same situation may provoke the less
responsible behavior of the ruling party, in that it does not
hold itself accountable to society because of the weakness of
the opposition.
2. The federative structure, religious factor, legal systems, and partici-
pation in wars are not directly related to governmental strength, but
they are—or may be—related to government spending levels.
Therefore, these factors are included in the various specifications
as control variables.
The following is the hypothesis of this study, as derived from the

sequence of events and/or causal relationships involved.
1. Universal suffrage:
1.1. Creates powerful left-wing parties that call for unlimited
public care rather than limited civil and social protection
(including spending control).
1.2. Powerful public mass media outlets have significantly
strengthened and popularized these redistribution coalitions.
1.3. In addition, powerful left-wing coalitions (with the partici-
pation of the public mass media) strive for and secure a
significant increase in their budget expenditure in relation to
GDP, which is often inconsistent with the national economy

and revenue base.
1.4. Poorly controlled growth of public liabilities often leads to
chronic budget deficits and an increase in public debt levels
against the constantly growing GDP, even in times of peace.
In addition to permanent factors, certain periods may also influence

whether a government will be strong or weak. (Government strength
and weakness are evaluated through the above control variables.)
Statistical analysis
As a powerful force, left-wing parties appear as the result of introducing
universal suffrage for the first time (regressions [1] and [2] of Table 5).
Leftists, who have their own central idea of lifelong care, use acquired
electoral power in order to increase their social spending, that is, public
spending in general (regressions [3] and [4]). Spending growth is not
always supported by an adequate increase in revenues, which leads to
consistent budget deficits in times of peace.
Manifestations of separatism do not form any meaningful relations
with the budget deficit or public spending (separatists’ share of GDP) in
the models and statistics in our selection. However, separatist votes,
when paired with leftist electoral power, further enforce the respective
hypothesis.
Grand coalition governments consisting of ideologically diverse
major parties clearly lack strength in terms of their ability to balance
the budget. (Ordinary least squares [OLS] specifications even show a
significant positive correlation with the scope of the budget deficit.)
Contrary to popular belief, weak minority governments are more
tightfisted than lavish; there is a noticeable negative relationship
between government spending levels and the number of years the
government has been in power. At the same time, however, there is
no meaningful relationship between the minority government in power
and the budget deficit amount.
In some cases, the restriction of political competition in democratic
countries (Sweden, Japan) leads to the emergence of a long-term ruling
party’s self-perception as the “natural elite,” and the country is then
regarded as the party asset. On the one hand, this may result in
Table 5
Left-Wing Parties and Rising Public Spending; Rising Public Spending and Budget Deficits (ordinary least squares, OLS)
Dependent variables
Leftists (1; 2) Spending to GDP (3; 4) Budget deficit to GDP (5; 6)
OLS OLS OLS OLS OLS OLS

Independent variables (1) (2) (3) (4) (5) (6)
Universal suffrage 16.9*** (0.26) 8.5*** (0.4)

Leftists 0.41*** (0.012) 0.14*** (0.002)
Spend_toGDP 0.156*** (0.017) 0.15*** (0.014)
Public media 16.9*** (0.82) 12.1***(0.8)
Civil law 10.2*** (0.63)
Federal state –4.85***(0.49)
Great war 15.2*** (1.8)
Local war 0.76** (0.33)
Neutral 1.6*** (0.2)
Japan –6.56*** (0.65)
Constant 16.5*** (0.237) 3.5*** (0.42) 10.9*** (0.3) 12.3*** (0.3) –1.37*** (0.27) –1.9*** (0.29)
Number of obs. 2,020 2,020 1,678 1,678 1,548 1,542
2
PROBLEMS OF ECONOMIC TRANSITION
Adjusted R 0.568 0.741 0.343 0.435 0.14 0.464

(Fixed effect)
311
(Continued )
Table 5 312
(Continued )
Dependent variables:
Leftists (1; 2) Spending to GDP (3; 4); Budget deficit to GDP (5; 6)
FE FE FE FE FE FE
Independent variables (1) (2) (3) (4) (5) (6)
Universal suffrage 16.3*** (0.25) 9.2*** (0.36) 0.26*** (0.02)

PROBLEMS OF ECONOMIC TRANSITION
Leftists 0.51*** (0.014)

Spend_toGDP 0.19*** (0.01) 0.15*** (0.01)
Public media 15.4*** (0.6) 10.8*** (0.8)
Great war 16.6*** (1.2) 15.5*** (0.6)
Local war 1.02** (0.47)
Neutral 1.52*** (0.40)
Constant 16.7*** (0.2) 11.3*** (0.3) 8.6*** (0.37) 8.16*** (0.33) –2.1*** (0.25) –2.3*** (0.3)
Number of obs. 2,020 2,020 1,678 1,678 1,548 1,542
2
R (overall) 0.568 0.681 0.343 0.450 0.140 0.374
Notes: ***p < 0.01; **p < 0.05; and *p < 0.1. Robust errors in parentheses.
Table 6
Wars and Universal Suffrage Make Balancing the Budget More Difficult
Dependent variable: Budget deficit to GDP
OLS OLS FE FE
Independent variables (1) (2) (3) (4)
Universal suffrage 0.754*** 0.647*** 0.854*** 0.555**

(0.119) (0.120) (0.125) (0.220)
GDP per cap. growth rate, % 0.031 -0.029 0.020 -0.036

(0.056) (0.058) (0.021) (0.068)
GDP 0.347 0.697***
(0.225) (0.070)
Neutral 0.485** 0.855**
(0.186) (0.321)
Great wars 17.424*** 16.627*** 17.386*** 16.677***
(1.911) (2.158) (0.571) (3.469)
Local wars 1.062** 1.061** 1.357** 1.288**
(0.395) (0.402) (0.434) (0.602)
Japan dummy -6.314*** -6.504***
(0.628) (0.755)
Civil law 1.362*** 1.161***
(0.204) (0.246)
Religion -0.263
(0.290)
Constant 0.157 0.570 0.528** 0.075***
(0.173) (0.378) (0.173) (0.12)
Number of obs. 1,669 1,518 1,669 1,518
Adjusted R2 0.420 0.401 0.340 0.354
irresponsible policymaking, but this perspective may also bring forth a

form of “stationary bandit” motivation as described by Mancur Olson
(2000). Statistically, it is clear that, compared with other types, limited
democracies are by no means the most wasteful. However, fixed effect
regressions eliminate any sort of statistical significance.
Even the integral measure of government “weakness” turned to be
pretty weak in its explanatory ability (low R2 in specification [3]
Table 11, lost its significance in fixed-effect regression) for the panel
as a whole.
Table 7
Separatism
Dependent variable: Budget deficit to GDP
OLS OLS OLS FE FE

Independent variables (1) (2) (3) (4) (5)
Separatism 0.27 0.56 3.47*** 0.03 5.3

(0.44) (0.51) (0.80) (1.4) (4.8)
Federal 0.02
(0.43)
Leftists 0.054*** 0.42*** 0.511***
(0.008) (0.012) (0.047)
Civil law -1.03
(0.50)**
Great war 16***
(1.7)
Constant 1.82*** 1.23 ** 10.3*** 1.86*** 7.5***
(0.14) (0.44) (0.3) (0.18) (1.1)
Number of obs. 1,767 1,731 1,662 1,731 1,662
R2 (overall) 0.0003 0.036 0.349 0.03 0.395
We proceed with the simultaneous analysis of several factors that

influence the political “strength” of a government: its ability to balance
revenues with expenses.
The only significant remaining factor of panel regression is the
influence of leftist voters; that is, in practice, universal suffrage (see
the first regressions in Tables 5 and 6).
Conclusion
Our analysis basically confirms the factors of high deficit and debt
discussed in the literature and that budget deficit is an indication of
government weakness.
The challenge of separatism in Canada and Belgium weakened public
finances. However, this predictor loses its explanatory ability for an
increasing number of observations. Weak minority governments could
Table 8
Grand Coalition Governments
Dependent variable: Central Government Budget deficit to

GDP
OLS OLS FE FE
Grand coalition 2.98*** 1.14** 2.94 0.52

(0.69) (0.55) (2.47) (1.11)

Leftists 0.05*** 0.04***
(0.006) (0.009)
Great war 16.6*** 16.6**
(1.9) (4.1)
Civil law 0.09
(0.3)
Federal 0.26 –1.24 –1.44*
(0.32) (1.79) (0.69)
Constant 1.42*** -0.06 1.86** 0.89**
(0.1) (0.27) (0.59) (0.25)
Number of obs. 1,741 1,711 1,735 1,711
R2 (overall) 0.03 0.33 0.02 0.302
explain a few cases but not the general trend for the whole sample. The
same is true for ideologically split governments and grand coalitions.
For instance, Switzerland, with one such coalition in power for many
decades, maintains its central government finances in a comparatively
acceptable fashion.
The ruling party’s ideology could be a useful explanation of the
expansion of a country’s budgetary commitments during prosperous
periods, but is a much weaker explanation of the reduction in public
spending in times of fiscal crisis.
Frequent changes of government weaken “leadership” stimuli and
strengthen politicians who seek opportunities to broaden their support
base at the expense of “temporary” public financial imbalance.
Plummeting public expectations are crucial factors of budget auster-
ity reforms designed to address budget deficits and public debt reduc-
tion. Low expectations pave the way for a new government, and the
Table 9
Minority Governments

GDP
OLS OLS FE FE
Minority government –0.07 0.06 –0.21 0.076

(0.26) (0.2) (0.32) (0.373)

Leftists 0.057*** 0.042***
(0.005) (0.009)
Great war 16.8*** 16.7**
(2.0) (4.3)
Federal 0.397* –1.3*
(0.211) (0.67)
Constant 1.77*** 0.1 1.8*** 0.83**
(0.15) (0.17) (0.07) (0.28)
Number of obs. 1,720 1,690 1,720 1,690
R2 (overall) 0.00 0.326 0.00 0.301
Table 10
Restricted (Limited) Democracies

GDP
OLS OLS FE FE
Democracy restricted –1.97*** –1.82*** –1.38 –0.51

(0.3) (0.30) (–1.00) (0.96)
Leftists 0.05*** 0.04***
(0.006) (0.009)
Federal 0.44* –1.32*
(0.26) (0.66)
Great war 16.84*** 16.7**
(1.96) (4.3)
Civil law 0.75**
(0.21)
Constant 2.11*** –0.18 2.00*** 0.96**
(0.14) (0.22) (0.18) (0.27)
Number of obs. 1,741 1,711 1,741 1,711
R2 (overall) 0.02 0.342 0.02 0.309
Table 11
Combined Influence of “Strong” and “Weak” Governmental Factors

GDP
OLS GLS OLS FE FE

Independent variables (1) (2) (3) (4) (5)
Democracy restricted –1.89*** –0.63 –0.48

(0.31) (1.13) (1.5)

Leftists 0.042*** 0.034** 0.033**
(0.007) (0.012) (0.016)
Minority –0.075 –0.06 –0.08
government (0.25) (0.37) (0.39)
Grand 1.66** 1.6 1.58
coalition (0.74) (2.7) (2.8)
Weak governmentt 0.58** 0.145
(0.27) (1.089)
Universal suffrage 0.895*** 0.93**
(0.140) (0.24)
Constant 1.02*** 0.93** 1.31*** 0.96** 1.48**
(0.16) (0.46) (0.13) (0.25) (0.43)
Number of obs. 1,690 1,690 1,760 1,690 1,760
R2 (overall) 0.063 0.057 0.028 0.026 0.026
latter is better able to pursue financial stability (transition slumps, in the

case of postsocialist countries).
The only predictor, and a powerful one, of the reproduction of
modern democracies’ fiscal problems is the phenomenon of modern
left-wing parties, brought to power by universal suffrage. It is this
institution that has established the long-term mechanism of voter and
political corruption.
Three lessons must be learned by leaders starting economic reforms
in new democracies facing severe crisis:
● Cut spending and do not hike taxes (to collect new taxes is a fairly
difficult task for a weak transitional government);
● Deregulate radically; you cannot afford all this nonsense (Friedman,
1994); and
● Build a coalition for reforms, appealing to a sense of patriotism, as the

balanced budget is the basis for real independence; stand for national
and cultural identity and claim to preserve broadly shared values
(Sharansky, 2008); make reforms for the sake of these values, not
just to follow foreign experts’ judgments due to get next tranche from
International Financial Organizations.
Supplemental Material
Supplemental data for this article can be accessed on the publisher’s

website at https://doi.org/10.1080/10611991.2017.1321418.
Notes
1. The structure of the spending (pure and mixed public goods production and
provision) is crucially important as well. We address the latter issue in an earlier
study (Yanovskiy, Zatcovecky, and Syunyaev, 2014).
2. The 2012 U.S. vice-presidential debate is available at www.youtube.com/
watch?v=j3roG09O6T4/.
3. For a historical (preuniversal suffrage) perspective, see supplemental materials
on the publisher’s website.
4. Including those states (taxpayers’ democracies) that established universal
censuses for voting franchises in the past, selected for statistical analysis.
5. See the data set in the paper “Democracy of ‘Taxation-Redistribution’ and
Peacetime Budget Deficit”; available at http://ssrn.com/abstract=2367861/.
6. The Swedish SDP led the government in the years 1932–76, 1982–91, and
1994–2006 (sixty-five years in a seventy-four-year period).
7. The full set of cases covering post–World War II history cannot be presented
in article format. For few additional cases (Canada, Germany, United States), see
supplemental materials (online only). For a full set and extended version of case
descriptions, see the Project Report at SSRN: https://doi.org/10.2139/ssrn.2708533.
8. See www.parties-and-elections.eu/belgium2b.html.
9. World Bank statistics, World Development Indicators, 2015.
10. Cargill, Sakamoto p. 222
11 Nagy (2014) stressed that Koizumi used nationalism to weaken the LDP
factions’ power and to advance reforms.
12. Ibid., p. 225.
13. As well as in today’s Greece.
14. Gaidar coined the term “nationalist anesthesia” to describe the phenomenon
during discussions in which the study’s authors were privileged to participate.
15. Led by the Communist Party of the Russian Federation and by the Liberal-
Democratic Party.
16. “In the last four years, Britain has recovered her confidence and self-respect.
We have regained the regard and admiration of other nations.” See www.margar
etthatcher.org/document/110859/.
ORCID
Konstantin Yanovskiy http://orcid.org/0000-0002-7014-0522
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Problems of Economic Transition

ISSN: 1061-1991 (Print) 1557-931X (Online) Journal homepage: http://www.tandfonline.com/loi/mpet20

Political Factors behind Cuts and Surges in

Konstantin Yanovskiy, Sergei Zhavoronkov & Kirill Rodionov

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KONSTANTIN YANOVSKIY , SERGEI ZHAVORONKOV, AND

Political Factors behind Cuts and Surges in

Keywords: weak government, Separatism, political competition, budget

Konstantin Yanovskiy is a senior research fellow at the Russian Academy of

Why do some governments manage to balance the budget while others

intended to cut or expand them are implemented (Benedicta Marzinotto,

United States spent a substantial amount of its resources on protecting a

Constitution, government structure, and ability to balance the budget

statistical analysis of the fiscal policies of seventeen democratic coun-

Constitutional limitations of debt and budget deficits

Reagan administration increased the defense expenditures that were

Ideological cleavages and fiscal policies’ outcomes

This is why it is important to take into consideration studies that

Experience of budget consolidations

Budget deficit consequences: Deficit and economic growth

Sweden: “Generosity” (1964 to 1983; 1991 to 1994) and austerity (1984

● Lasting peace and well-rooted strong institutions that protect private

property and the proprietor. The Socialists, upon coming to power,

Belgian spending expansion 1974 to 1981

Swedish Surges and Cuts

Central government Central

1964 Erlander—SDP; 21.8 1.23

Central government Central

1995 SDP Minority governments (backed 42.5 6.97

1998 37.4 –1.06

SDP: Social Democratic Party.

leading left-wing and conservative parties into the respective

Central government Central

1974 CVP/PSC, PVV, PLP (Christian 27.4 0.16

1977 Government coalition principal 33.3 0.28

of societal split as the result of conflicting ethnic and linguistic aspects

Japanese “lost decades” fiscal policy: From stimulating growth to budget

stimulated by fiscal incentives. The only way to return to growth was to

Japanese Surge, 1970–1983

Government Central government spending Central government deficit

1970 Liberal 26.7 –3.82

Postsocialist countries reduced spending during the 1990s transition

The universal lesson of transition from socialism to a free market is

To abandon national pride and moral values in public discussion to

Latvia 2010 to 2013

Central government Central

2009 Coalition of conservatives, 43.42 9.0

Summary of country cases

democracies experienced in taxpayers, consensus democracy before

the introduction of this institution. The following variables are used in

1. The authors have attempted to introduce certain indicators for a

1.1. A minority government (including the U.S. administration,

paribus, weaker than governments that are not experiencing

Universal suffrage 16.9* (0.26) 8.5* (0.4)

Universal suffrage 16.3* (0.25) 9.2* (0.36) 0.26*** (0.02)

Universal suffrage 0.754* 0.647* 0.854* 0.555

Grand coalition 2.98* 1.14 2.94 0.52

Democracy restricted –1.97* –1.82* –1.38 –0.51