Budget Deficits and Reelection Prospects: Voters as Fiscal Conservatives in a New Democracy

Paulo Arvate
George Avelino
José Tavares, Universidade Nova de Lisboa

Abstract

State elections in Brazil are an excellent laboratory to test the fiscal preferences of voters in new democracies. Brazil is a developing economy with a history of large budget deficits at the federal and state level, with a established democracy since the late 1980´s, mandatory vote and considerable social and economic diversity. In addition, in 1998 Brazil has undertaken substantial reforms increasing fiscal responsibility at the state level that substantially altered the incentives to run deficits. This paper uses the experience of state level elections in Brazil in the period from 1990 to 2002. We identify a change in politicians´ behavior in the term before the 2002 elections and present evidence that this change is mostly due to a series of institutional reforms that hardened budget constraints. Our results show that, despite the prevalence deficits, the governors did not increase their reelection prospects by running larger deficits. Moreover, after the fiscal reforms, fiscal deficits turn almost immediately to surpluses while the probability of an incumbent being reelected increased. We conclude that voters in Brazil behave much like their counterparts in older democracies, showing evidence of fiscal conservatism. Brazilian voters needed neither more experience with democratic elections nor better information to reward fiscally conservative politicians.