Fiscal Deficit Strategies and Their Effects on Political Polarization: the Discretionary Use of Constitutional Spending Rules in Latin America between 2000 and 2012

Abstract

This paper examines how the governments in Latin America design strategies, based on existing constitutional norms, to channel public spending that recruits allies and, with it, benefit from political fragmentation (i.e. the marginal increase of actors with organization and national representation). If the constitutional norm limits such discretion, it will act as a brake on fragmentation. By controlling the influence of the economic situation (since fiscal spending changes over the course of the economic cycle), the governments will maximize their discretion by spending resources that ensure the support of potential allies within constitutional restrictions. By applying a battery of econometric panel tests, we find that with respect to budget spending discretion, there is an associated increase of almost 1.2 percentage points in political fragmentation for each percentage point of deficit, and with respect to budget results, an associated increase of almost one percentage point, in the event that Congress approves the budget. In relation to exclusivity in areas reserved for the Executive, there is an increase of 0.75 percentage points in fragmentation. The effect of budget spending is more powerful in said fragmentation: 15% to 55% more visible than the effects of results in mere approval or in the areas reserved for the Executive in economic and financial matters. The budgetary effects reflect a greater incidence in the period prior to 2008. After that date, discretion and its incidence in spending changes, to give the Executive power to reserve powers in economic and financial matters.