Budget Manipulation and Vertical Fiscal Imbalance

Evidence of Political Budget Cycles from cross-countries studies has been rationalized as coming from voter’s cost to process available information and asymmetric information. This explanation was also adopted in most cross-province studies leaving aside variables related to the incentive structure of fiscal federalism. This paper investigates electorally-induced fiscal fluctuations in Argentina for the period 1985-2007. Province –level dynamic panel data reveals that vertical fiscal imbalances in subnational districts fuel fiscal expansion and changes in expenditure composition, favoring current expenditure in detriment of investment, in election years.