Explaining the Distribution of Fiscal Transfers between Belgian Regions : The Effect of Political Representation
This paper investigates the role of political representation in explaining regional variation in fiscal transfers in Belgium. Using Eurostat data for the years 1995 to 2008, we find that on average per capita cash fiscal transfers – consisting of the net amount of federal income taxes and social security contributions paid and social security benefits received - to a Belgian province increase by between 12 and 36 euro per capita and per year for every minister originating from that province. This represents about 10 to 30 percent of the variation in per capita transfers to a province over time. This result is robust to controlling for economic and demographic variables that are important determinants of transfers, i.e. (gross) income per capita, the unemployment rate, and the proportion of the population above the retirement age. To our knowledge we are the first to demonstrate statistically that in Belgium political factors do matter with respect to fiscal transfers. Our finding seems also quite unique from an international perspective: we do not know of any other explanation of fiscal transfers in particular or formula based expenditures in general (as opposed to discretionary expenditures) by (1) regional origin of cabinet ministers in particular, or by any other variable pertaining to the executive in general. Moreover we do not know of any such finding in the context of (2) a proportional voting system, which appears to offer less of an incentive to politicians to try and favour their electoral district than a majority voting system. Another finding of our paper is that for a Belgian region, while delivering a cabinet minister appears to 'buy' transfers, delivering parliamentary seats supporting the government majority does not. From a democratic point of view, this could be regretted. Being rewarded by fiscal transfers for delivering parliamentary seats could be considered as belonging more to the 'normal democratic game' than being rewarded for being lucky enough to be the place of provenance of a cabinet minister. The legislative could be argued to have more legitimacy than the executive. A side-finding of the paper is that to be the province of origin of a cabinet minister appears to be more rewarding for a French speaking province than for a Flemish province. Finally, we wish to make the observation that potentially the most considerable impact of politics on (the regional distribution of) fiscal transfers could evidently be expected to happen indirectly: politicians may have a non-negligible influence on the economic control variables (unemployment, income per capita) of our analysis that are significant in explaining fiscal transfers. In this sense the current analysis is limited in that it only estimates the direct effect of political variables on the regional distribution of fiscal transfers in Belgium while keeping socio-economic factors such as unemployment constant