Ignorance isn't bliss: Uninformed voters drive budget cycles

Abstract

The paper shows that blissful ignorance does not apply to fiscal policy. In countries with insufficiently informed voters, politicians attempt to "?buy' votes by substantially increasing government expenditures in election years and tightening the belt post election. This generates costly budget cycles and unnecessary macroeconomic fluctuations. Unlike much of the earlier literature that found this effect only in low income countries or new democracies, we demonstrate that it has occurred in many prosperous countries with an established political system. In particular, constructing an Informed-voter (INFOVOT) index, we show that only the top third of OECD countries with well-informed voters does not experience political budget cycles. In contrast, the bottom third of OECD countries with poorly-informed voters see a deterioration of the budget balance by 1% of GDP on average in election years, which represents an increase of more than 25% relative to their usual budget deficits. Interestingly, for the intermediate group of countries with moderately-informed voters, for example Austria, France, Germany, Japan, Luxembourg, the U.K. and the U.S., election deficit hikes (of 0.75% of GDP) are observed during the 1995-2008 period only, but not since. We discuss why their budget cycles may have disappeared after the Global financial crisis, unlike in countries with poorly-informed voters, drawing on the "?rational inattention' literature. We also offer some policy recommendations that could improve the voters' incentives to acquire and process fiscal policy information, and thus avoid an "?ignorance trap'.