Are Politicians Successful in their Electoral Strategies? The Case of Tax Revenue Budgeting Errors
This paper aims to examine the effect of tax revenue budgeting errors on fiscal balance and mayor's party re election. Specifically, we contribute to the literature by testing whether the relationship between tax revenue underestimation and fiscal balance is influenced by political ideology, political strength and the electoral cycle. To this end, we use a 1994 2008 panel of the largest Spanish municipalities. Our results reveal that underestimating tax revenue increases fiscal surpluses or reduces fiscal deficits. Tax revenue underestimation puts pressure on expenditure, thereby creating a revenue windfall and reducing the deficit. Thus, politicians use these resources to serve their own electoral interests rather than to citizens' preferences. The impact of tax revenue budgeting errors on the fiscal balance depends on mayors' political strength and the electoral cycle. In fact, we provide evidence that politicians create buffers by underestimating tax revenue, thereby reducing (increasing) fiscal deficits (surpluses) in the preceding years, to increase expenditure in the pre election and election years. Finally, our estimates reveal that tax revenue underestimation two years before elections influences the mayor`s party reelection prospects positively.