5 - Four Sides of the Budgetary Ledger

Summary

We turn to the larger pieces of the budget in Chapter 5, where we focus on two objectives. First, we ask how the components of the budgets fit together by conducting causality tests for the full range of possible relationships between expenditures, revenues, deficits, and budgetary volatility using a panel vector autoregressive (pVAR) model. We find that changes to expenditures and revenues drive changes to deficits, and we also find that changes to deficits lead to revenue changes. Second, using findings from these causality tests from the pVAR model, we then test our expectations about ideology and context on total spending, revenues, budget deficits, and budgetary volatility. Once we include these causal relationships in our models, we find that government ideology and majority status do not appear to alter either total expenditures or revenues, but a shift from a left to a right majority government is associated with a long-run decrease in deficits. For budgetary volatility, a move from a left to a right majority government corresponds with a positive significant increase in volatility. These findings fit our expectations that it is political competition that shifts budgets, with government ideology many times proctoring for those differences.