an explosive path in most EU countries due to the large amounts of implicit liabilities that Member States
have accumulated and continue to build up. In light of this challenge, addressing the causes for the deficit
bias is a major and urgent challenge in a number of EU countries.
2.3. Reasons for the deficit bias point to the short-term horizon of policy-makers
2.3.1. Explanations for the deficit bias
The reasons for the conduct of undesirable fiscal policies leading to persistent deficits have been
addressed extensively in the economic literature. Most explanations are based on political economy
considerations related to the short-term horizon of policy makers, which in turn leads to time-inconsistent
fiscal policies.
The electoral cycle and voters’ fiscal illusion
A first possible explanation for the existence of a deficit bias is related to the fact that individuals (voters)
tend to see the short-term benefits they can get from lower taxes and increased government spending but
are not always fully aware of the possible long-term costs of such policies.^4 This 'fiscal illusion' would
notably explain why governments conducting policies leading to high and unsustainable deficits are not
always punished by voters. Instead, voters’ behaviour would provide incentives for opportunistic
politicians to improve their chances to be re-elected through the implementation of unfinanced tax
reductions or expenditure increases.^5 This can also result in asymmetric fiscal policy over the cycle, since
governments generally get more support for implementing expansionary fiscal policies during downturns
than for consolidating government finances in upturns.^6
An alternative argument why voters would not punish excessive lending has to do with intertemporal
redistribution. The generation that is alive today may prefer leaving the burden of debt to future
generations while taking advantage of today's lower taxes and higher public spending. Since the current
generation is the only one that votes, such preferences may provide incentives for undesirable policies
from a society point of view.
Short-term strategic behaviour of political parties
Another explanation for the deficit bias is based on the influence of strategic actions of political parties.
Several authors (see notably Persson and Svenson, 1989) argued that the behaviour of political parties
that are likely to alternate in office can feed the deficit bias. For instance, governments with little chances
of being re-elected may be tempted to run deficits and accumulate debt in the course of their mandate so
as to prevent future governments from engaging in ambitious programmes or in activities inconsistent
with the priorities of the administration currently in power (Tabellini and Alesina, 1990). As a result, the
larger the probability of an electoral defeat for the administration in power and the larger the difference
in preferences between parties, the larger the deficit bias may be (Calmfors, 2005). This explanation
might be particularly relevant for those countries experiencing a high political unrest.
(^4) See Alesina and Perotti (1994) and papers of the “public choice” school (Buchanan (1959), Buchanan and Wagner
(1977), Buchanan and Tullock (1962)).
(^5) Persson and Tabellini (1998) showed that taxes are generally cut before elections and that painful fiscal adjustments are
postponed after elections. Buti and van den Noord (2004) put in evidence the role of electoral cycles in explaining
budgetary developments.
(^6) While electoral cycles and "fiscal illusion" have so far been widely accepted as explanatory elements for the deficit bias,
this view has been challenged by recent research. See notably Brender and Drazen (2006).