Fiscal performance and elections in the context of a transition economy

It is widely accepted that, in democratic societies, incumbent governments may use various means such as discretionary spending to increase their chances of re-election. In the context of potential budget constraints (e.g. large debt), the incumbent may consider alternative means. Tax revenue performance could be one such means prone to incumbents’ electoral manipulations, particularly in the case of transition countries with a weak institutional framework. Investigating Albania, we show that fiscal performance, measured by monthly tax revenues, is poor before elections, especially in the case of elections that result in political rotation. Prior to “all elections” we observe a reduction in tax revenue growth ranging from 3.2 percentage points during the twelve months before elections to 4.0 percentage points during the six months before elections. This implies more than a halving of fiscal performance as compared to its long-term “natural” or average rate. Moreover, the deterioration in performance is considerably larger, double to triple, before “rotation elections”. After elections, improved fiscal performance is observed. The key to reducing fiscal performance deterioration associated with elections is to establish rules and institutional supervision (independent or bipartisan) that reduce the discretion of tax authorities.