DP1555 | Electoral Institutions, Cabinet Negotiations, and Budget Deficits within the European Union

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Two literatures in political economy argue that differences in political institutions help explain variation in the fiscal performance of countries. They indentify electoral systems and institutions that structure the formation of the budget as important determinants of the budget deficit. In this paper we indicate that these two arguments complement one another. Electoral institutions matter because they restrict the type of budgetary institution a state has at its disposal to solve the coordination problem involved in the budget negotiations. The theory and the empirical results indicate a strong relationship between one-party governments and strong finance minister solutions on the one hand, and multi-party or minority governments and the use of formal budget targets on the other. Pooled time series regression supports our contention that the presence of one of these budgetary institutions matters more than the plurality/proportional respresentations dichotomy.