THE POLITICAL ECONOMY OF FISCAL DEFICITS: A SURVEY

Abstract This paper surveys recent literature, both theoretical and empirical, regarding political explanations for fiscal deficits. Political economy suggests conflicts of interest may lie behind the emergence of deficits: (1) Opportunistic politicians generate deficits to win elections, even in conflict with general welfare; (2) Conflicts of interests between politicians’ partisan preferences create incentives for (at least some) incumbents to run deficits and (3) Conflicts of interest between different social groups or regions generate tensions in the allocation of government resources leading to overspending. This paper reviews these different strands of the literature. It also covers contributions that highlight the crucial role of budget institutions in determining the extent to which the political motivations to generate deficits are indeed translated into poor fiscal outcomes. Promising avenues for future research are highlighted.