Politics, political competition and the political budget cycle in Canada, 1870 - 2000: a search across alternative fiscal instruments

In this paper Engel-Granger time series methodology is used to combine trending economic variables with stationary political factors to search for well-defined political influences on central government budgets in Canada over the entire post-Confederation time period from 1870 to 2000. To motivate such an inquiry we first investigate and find evidence of partisan political influence on Canada’s macro aggregates. However, because politics can influence economic outcomes only if there is a transmission mechanism through actual public policy choices, our finding of cycles in real output growth begs the question of whether such cycles arise through fiscal policy. Our analysis of three main fiscal policy instruments - public non-interest expenditure, taxation and the deficit net of interest - gives little support to any current political theory of public budgets, but does support the hypothesis that the degree of political competition matters for policy choices in both the long and short run. This new channel for the influence of politics on economic policy has not previously been isolated empirically in Canada and poses new questions in trying to reconcile the previous mixed results with respect to the influence of politics on economic aggregates.