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The Politics Of Budgeting: Evaluating the Effects of the Political Election Cycle on State-Level Budget Forecast Errors

PAQ, Vol. 36 No. 1, (2012)

Budget forecasts are used by incumbent governments as a political tool to manage the electorate’s expectations of overall job performance, particularly during an election cycle (Bruck and Stephan 2006). Incumbents apply budget forecasts strategically. They use short-term forecasts, which are more likely to be unbiased by political factors, annually. They rely on long-term forecasts, which are likely to be biased by political calculations, to set their political agenda (Corder 2005). Incumbents attempt to maintain stability and popularity through short-term forecasts, and retain political power as well as manage the interests and demands of their constituents through long-term forecasts. Regardless of the type of forecast applied, incumbents will typically underestimate forecasts in order to downplay overall spending increases and demonstrate that they are responsible managers of the public purse (Rogers and Joyce 1996). Could there be an ulterior motive for underestimating surpluses and deficits? My research that incumbents downplay forecasts so they can claim credit for properly managing public finances and provide themselves with enough leverage to increase spending during non-election years to win votes.

This paper tests this hypothesis at the state level by developing three differing approaches to estimating budget forecasts. First, the naïve model simply estimates budget forecast errors based on economic data (e.g. tax receipts, expenditures). Second, the strategic model, which builds on the naïve model, incorporates political variables into estimating forecast errors (e.g. party control of the legislature and governor, national political factors). Last, the incentive model, which builds on both previous models, integrates the political cycle with budget forecasts (e.g. terms in office, proximity to the next election). By using these three approaches, the model utilizes state-level and national-level political variables to explain the errors generated by budget projections in order to provide a deeper understanding of how states manage fiscal policy by addressing how the political-business cycle effects budget projections. The data used to test this hypothesis will come from state-level budget submission for the beginning of the fiscal year (1992-2008).

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