Fragmented governments and the common pool problem
Another part of literature has studied the influence of voting rules and political systems on budgetary
outcomes. Roubini and Sachs (1988) argued that the extent of dispersion of political power among
different parties in the government could explain part of the rising spending pressures that appeared in
the 70s and 80s. At that time, the growing strains on public budgets were not associated to demographic
factors but to pressures exercised by different groups of interest through political parties. The theoretical
underpinning of this explanation draws on the “common pool” problem, which arises when several
players representing different interest groups bargain on the allocation of public resources with the view
to satisfy their own base. Each actor tends to maximise appropriation, without internalising the overall
budget constraint (Hallerberg and Von Hagen, 1999). In the absence of a clear delegation of powers to a
strong Finance Minister (delegation approach) or of preliminary agreements or pacts within the cabinet
(contract approach) to decide on budgetary allocations in a centralised manner, this situation can lead to a
deficit bias.
2.3.2. Recent economic and political developments might have strengthened those elements behind
the deficit bias
Most of the possible explanations for the deficit bias described above were already valid a long time ago.
However, as previously seen, the deficit bias has gained considerable strength from the 1970s onwards.
This suggests that a number of recent political and economic developments have had an influence on the
deficit bias.^7
Lower potential growth, the size of the public sector and globalisation
The increase in the deficit bias has coincided with decelerating growth rates in most advanced economies
and an increase in the size of the public sector reflecting the involvement of governments in a growing
number of economic activities (e.g. the production of goods and services) and the extension of the
welfare state (see Figure 2).^8 The higher expenditure associated with the increasing demand for public
services were not always matched by similar increases in revenues. This can be explained by the
potential economic and electoral costs of raising an already high tax burden in an integrating world
economy in which certain tax bases have become more mobile. Obviously, this does not entail a causality
relationship between the size of the government and the deficit bias; some countries show simultaneously
sizeable public sector and sound fiscal positions. This only suggests that large public sectors might
favour those elements behind the deficit bias.
(^7) Political changes occurred during the twentieth century could also partially explain why those elements behind the
deficit bias have gained strength. It is broadly recognised that policy making in democratic systems is associated to an
inherent deficit bias largely due to the elements described in section 2.3.1. As democratic regimes extended through
most of industrialised countries those factors linked to the electoral cycle and 'selfish generation' may have had an
increasing influence on the deficit bias.
(^8) Explanations for the growing size of public sectors over the last decades point to a wide range of possible causes: from
the Wagner's Law and Baumol disease theories to interpretations arguing that the expansion of the public sector mostly
stemmed from economic policy decisions reflecting changing perceptions about the role of the government. In line with
this reasoning, Rodrik (1998) argues that trade openness and market integration experienced in recent decades may help
explain the rising burden on public budgets caused by public social expenditure, subsidies and transfers. The degree of
exposure to international competition would increase the demand for insurance against external shocks and more open
economies would have larger public sectors. This might have bolstered the tendencies towards time inconsistent fiscal
policies and led to a higher deficit bias (Annet, 2005).