Question

Do governments manipulate fiscal policy to win elections? India

Answer 1

Is it mere coincidence that Governments often reduce taxes or increase spending close to elections? Intuitively, many of us think that governments manipulate fiscal policy for electoral reasons (see Drazen 2001).

However, the empirical evidence is far from a clear cut.

Testing the hypothesis that government’s tweak their fiscal policy in order to lure voters is difficult. An increase in government deficits before an election is not a ‘smoking gun’. It could be a chance –deficits move for a variety of other reasons that can be entirely unrelated to the political cycle. Indeed, if politicians are able to influence the date of an election they would have an incentive to time them after expansionary fiscal policies (that are needed for a variety of reasons) in order to gain electoral support.