Deficits and surpluses in federated states: A review of the Public Choice empirical literature

The purpose of this paper is to review the empirical Public Choice literature explaining deficits levels in federated states. First, I descritbe theoretical constructs, showing how new theories are developed by releasing one of the basic Ricardo-Barro assumptions. Empirical results bearing on the federated states of Australia, Canada, Germany, Switzerland, and the United States are then reviewed to assess which hypothesis, in which setting, is confirmed by systematic observation. On the whole, this literature shows that economic cycles have an impact on budget balances. It also shows that deficits are higher in election years in German Lander, Canadian provinces, and American states, but not in Australian states nor in Swiss cantons. In addition, the literature tends to support the hypothesis that the stringency of budgetary rules is related to higher budget balances in Canada, Switzerland, and in the United States. Finally, government fragmentation has no impact on the budget balances of federated states and parties of the left do not have higher deficits than parties of the right, except in Switzerland where empirical evidence is mixed. Rather, parties of the center or of the right do have higher deficits in German Lander and in Canadian provinces. In the concluding section, I discuss two issues: the impact of rules, and the partisan cycle hypothesis.