Do Parties Matter for Fiscal Policy Choices ?

In this paper I test whether parties matter for fiscal policy choices, i.e., government spending and level of taxes. It is part of conventional wisdom that the Left spends and taxes more than the Right. However, there are very few convincing empirical studies that show this to be the case. I argue that this might reflect either the data sets used, or the employed methodology. By using a very large cross-section and time-series data set from Swedish local governments, N=274 and T=21, I avoid many of the difficulties with crosscountry comparisons. I find significant and sizeable partisan effects; left-wing parties spend and tax more than right-wing parties. These effects are particularly large where the same party has had a long tenure in office. On average, left-wing parties have 13 percent higher real spending per capita and 7 percent higher income taxes than do right-wing parties. I also show that ignoring parameter heterogeneity could lead to biased or meaningless estimates of partisanship effects. In particular, this issue concerns research, which are based on the use of OLS or FGLS estimators. ∗ I am grateful to Torsten Persson for helpful discussions and suggestions. I have also benefited from conversation with David Strömberg and David Vestin, and by the comments made by seminar participants at IIES, FIEF and Uppsala University. The views expressed in the paper are mine, as is the responsibility for any mistakes. ♣ Institute for International Economic Studies (IIES), Stockholm University, S-10691 Stockholm, Sweden. e-mail: [email protected]