Does Political Competition affect Fiscal Structure? What time series analysis says for Canada, 1870–2015

This paper asks whether political competition has played a role in moderating the governance issues that arise in relation to Canada’s fiscal structure. By fiscal structure we mean three distinct but interrelated fiscal dimensions of the state: financial stability, long run size and short run interventions into the private economy, particularly with respect to the business cycle. The distinctiveness of this paper is that it focuses on four different measures of the degree of political competition: the size of the seat majority of the governing party in the House; the distribution of the volatility adjusted winning margins of the governing party; the proportion of electorally marginal constituencies adjusted for asymmetry; and the Przeworski-Sprague measure of electoral competitiveness at the constituency level. The analysis accounts for the differing time series properties of the political and economic variables and the comingling of long and short term fiscal policies in the time series data while finding support for the hypotheses that greater political competition will enhance fiscal stability (maintain a non-accelerating debt to GDP ratio), that government size will converge from above on economic and structural fundamentals and that period deficits/surpluses will align better with the business cycle. The potential impact of greater political competition is analyzed by applying the deficit model to the period of fiscal instability that arose in the 1980’s. JEL classifications: H1, H3, H5