Budget Deficits and Coalition Governments

This paper shows that compromise between different ideological motivations within multiparty governments may result in a bias toward running budget deficits even if all parties in the coalition prefer balanced budgets. The deficit bias increases with the degree of "polarization" of the ideological motivations and generally decreases with the degree of concentration of power within the government. Although the analysis is conducted assuming a proportional representation electoral system, the results will also apply to majoritarian systems if the winning party comprises ideologically different constituencies. The relationship between budget deficits and multiparty governments is investigated using data from a sample of eight European Union countries for the period 1971-1990. Analysis on pooled data is partly in line with the theory. Time series within country analysis is less favorable: we find clear support to the theory only in the case of Italy.