Explaining the distribution of fiscal transfers between Belgian regions: The effect of political representation

This paper investigates the role of political representation in explaining geographical variation in social security and income tax transfers in Belgium. The transfers we consider are the net amount of federal income taxes and social security contributions paid and in-cash social benefits received. These make up the core of the Belgian welfare state and income redistribution. For the 1995-2010 period, we find that these transfers to inhabitants of a particular Belgian electoral district increase significantly with every extra federal minister originating from that electoral district. Given that such transfers are largely formula-based, and if anything would be easier to target across social groups rather than geographically, this result is surprising. Nevertheless, the result is robust to controlling for economic and demographic variables that are important determinants of transfers, i.e. (gross) income per capita and the share of the unemployed, the young and the retired, as well as to controlling for the share of parliamentary seats of the governing coalition per electoral district. The observed correlation between political representation and transfers is suggestive of a system with simultaneous causation, with politicians steering transfers to their constituencies in the hope to gain votes; and where voters in turn reward politicians in the hope to gain transfers. To isolate and quantify the causal link going from political representation to transfers, we identify two sets of exogenous changes in political representation and use an instrumental variable approach. A first set considers changes in political representation due to ministers having to resign, mainly due to political crises and scandals. A second set considers changes in the political representation due to changes in the borders of electoral districts in 2002.