The Mechanism of Political Budget Cycles in Greece

Extended empirical research has established the existence of political budget cycles in Greece but remains agnostic about the mechanism which generates them. In this paper we contribute to the literature by investigating precisely this mechanism of the creation of political budget cycles using data from the Greek economy for the last four decades (1980–2018). We find that it is via the manipulation of public expenditure rather than through the handling of public revenue that opportunistic politico-economic behaviour arises. We go on to build a novel empirical model linking government spending and revenue and estimate that, in years of general elections, public expenditure rises by around 2.2% of GDP. This level is not typical of a developed economy. Still, our finding is robust to various specifications of our model, both linear and non-linear, and hints towards a severe decline in the underlying political culture of the country. We conclude that, in the case of Greece, future fiscal rules aiming to suppress the political budget cycles phenomenon should target the control of pre-election transfer payments instead of resorting to tax increases.