Romanian Journal of Political Science.

Political Constraints and Discretionary Fiscal Policy during the

Recent Economic Crisis
Daniel Duma1
ABSTRACT
Political institutions have been found to be the source of many policy differences between
countries. Elaborating on earlier work in this tradition, this article will suggest an
association between institutional veto power creating political constraints, and the
discretionary fiscal policy reaction of governments during the economic crisis of 2008. It
will be argued that the institutional configuration may have played a role in shaping the
different discretionary fiscal policies adopted by governments. A limited empirical exercise
indeed suggests that greater political constraints are convincingly associated with a lower
fiscal package in a cross section of 46 countries with relevant country level controls.

KEY WORDS: veto points, political constraints, discretionary fiscal spending, economic
crisis

Introduction
Many policies adopted by governments differ significantly between countries, despite no
apparent justification in terms of general will, social or economic context. In other words,
while people may prefer similar solutions to similar problems, governments may end up
having truly different policies to address them. This phenomenon is often understood as
the result of the constraints faced by political actors in the process of policy formulation,
adoption and implementation (Weir and Skocpol 1985). The explicit rules, crystallized and
ossified in time, that stipulate how inputs from the body politic, are gathered and
transformed into policy initiatives and laws differ greatly from one country to another. It is
believed that these can influence structurally the capacity of governments to take action,
1

Daniel Duma is a PhD Candidate at the Bucharest University of Economic Studies. Email:
daniel.duma@outlook.com.

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irrespective of what that action may be. Convincing evidence from different levels of policy
has been presented in the political economy literature (Persson and Tabellini 2003;
Iversen and Soskice 2006). It has been argued that countries have chosen different
solutions for healthcare provision, social policy or even energy markets, not so much
because of different convictions or preferences of the electorate, but because of the way
in which institutions changed the incentives for political behaviour (Immergut 1992; MilesiFerretti et al. 2002; Henisz and Zelner 2006).
The argument here will be for a similar effect of institutions when looking at the
different approach of governments during the economic crisis of 2008. Faced with similar
problems, a shortfall in economic output and rising unemployment, most governments
chose fiscal policy to address them but with significant differences in terms of magnitude.
This could of course be explained simply by the different severity of the crisis or
budget constraints. There could be many reasons why governments ended up having
different responses to similar problems. However, it will be argued here that the
institutional configuration of different countries may have played a role in shaping the
policy outcomes. After all, institutions represent constraints to behaviour, and similar
institutions may impose similar constraints (North 1991). The number, alignment and
authority of political actors involved in the policy process contribute to the so called veto
power which could reduce the decision making capacity. This may have prevented some
governments from adopting an adequate fiscal package even in contexts when it would
have been both economically viable and socially desirable.
The literature on discretionary fiscal spending has focused more on its
consequences, being driven by the well-known disagreement over the size of the fiscal
multiplier. Thus, when looking at the response to the crisis, most studies have centred on
the effects, composition and duration of fiscal interventions, less so on why certain
policies, sizes or scopes have been chosen over others (Aizenman and Jinjarak 2012;
Khatiwada, 2009]. The few studies attempting to identify the determinants of fiscal
stimulus relied entirely on economic indicators such as the output gap, automatic
stabilizers or the fiscal space (Ahrens 2009; Horton and Ivanova 2009, Prasad and Sorkin
2009). What will be argued here is that further to the most intuitive explanations focusing
on the economic context, there are also political and institutional mechanisms that

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systematically influence the decision to design the fiscal response to an economic

contraction. Thus, the research question to be explored will be whether the political
configuration operationalized as political constraints can explain in part the difference of
magnitude between the fiscal stimulus policies chosen by different countries. In order to
build an answer to this research question, the article will start with a brief introduction to
institutional veto points and their interaction with political behaviour. This will be followed
by an exposition of the different discretionary fiscal policy choices of governments around
the world and the most plausible sources for this difference, including political constraints.
Afterwards, a limited empirical test will be attempted based on an OLS model and a
sample of 46 countries, and some conclusions will be suggested.

Institutions, veto power and public policy

The role of institutions is essentially that of formalizing the rules of interaction and
decision. These formal rules, according to institutional theory, in time, consolidate certain
stable structures of behaviour, guided by incentives and constraints (North 1991).
Taken as exogenous, on an abstract level, these formal rules become limits for
individual behaviour, defining the type, timing and terms under which interaction between
them occurs. More concretely, looking at political behaviour and at choice in particular, a
certain institutional setup creates the structure of incentives that drives policy making
(Shepsle 2010). What this implies is that one can observe patterns of policy associated
with particular institutions, with regard to both the type of policies adopted and their scope.
In other words, certain institutional settings can be both systematically associated with
the dominance of certain policies. There is a growing body of literature that provides
models whereby there appear to be systematic policy differences stemming from the
variation in institutional settings (Austen-Smith 2000). At the most fundamental level for
a democracy, different electoral institutions have been shown to be associated with
significant effects on the redistribution function of the government (Persson and Tabellini
2003). The particular structure of voting systems, especially districting and formula
choice, alters the distribution of preferences and results in different policy outcomes. In
other words, assuming there are two political units with similar individual preferences, the
rule of the game that establishes how the aggregation takes place is enough to

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significantly influence the decision that the group gets to take.

In a similar line of argument, the institutional configuration has been considered as
a determinant for the inherent capacity or incapacity of deciding on important policies. In
that sense, an important constraining role is played by the so called veto points
(Immergut 1992; Tsebelis and Chang 2004; Crepaz and Moser 2004). These represent
the actors formally capable of rejecting policy actions at different stages in the process of
design or implementation. Intuitively, the greater the number and heterogeneity of such
points translate into greater obstacles to overcome for a proposal to become reality. Thus,
the way in which the institutional architecture of a country is built can determine the
capacity of taking decisions, especially on highly divisive issues. The higher the number
of such points where initiatives can be delayed, changed, or even blocked, the lower the
chances for policies to come to fruition.
Veto points essentially allow relatively smaller groups to have a disproportionate
influence in blocking initiatives that may be against their interests (Huber et al. 2003). This
is equivalent to a high degree of aggregate veto power as the capacity to address
collective issues according to changing circumstances is diminished, and policy stability
or even inertia becomes the norm (Tsebelis and Chang 2004).
However, there are important differences in nuance between veto points. They can
be either partisan, with the power to reject stemming circumstantially from negotiations
under certain conditions, or institutional, i.e. the ones that have the statutory role of giving
consent before legislation is enacted (Warntjen 2008). More specifically, in the case of
the latter, the formal constitutional power given to certain actors in the process of decision
making determines the number of veto points. For example, a situation where the
government can by-pass Parliament in passing legislation where there is a single
chamber of Parliament would imply a lower veto power than one where the cabinet needs
formal approval of any piece of legislation before enforcement or the Parliament is
bicameral with different functions for the two chambers.
The theory of veto points started from the observation that parliamentary systems,
particularly unicameral ones, usually produce coalition governments that tend to be very
effective in implementing legislation in a relatively straightforward and contestation-free
fashion. After the stage of negotiating and reaching consensus within the coalition,

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decisions are then implemented with apparent ease. However, in systems with multiple
levels of decision such as federal, central and local, with two parliamentary chambers or
presidential veto power, the process of implementing policies is simply more difficult, as
an initiative may be delayed, significantly changed or even stopped, at any of the
checkpoints on its way to becoming law (Huber et al. 2003). The number of veto points
has generally been considered to be directly proportional with policy inertia. There seems
to be evidence that veto points are indeed linked to a constraining effect on government
(Warntjen 2008).
Constitutional veto players in conjunction with the degree of alignment and
heterogeneity between them forms the basis of the notion of political constraint,
understood as a general limiting factor to significant policy change (Henisz and Zelner
2006). Veto power and political constraints have been shown to have been decisive in
the arrangement of various types of public policies. One of the most famous examples is
the case of healthcare provision in the United States (Steinmo 1992; Immergut 1992).
A comparable phenomenon is said to have been at play with respect to the welfare
state in general, with detailed accounts suggesting that the institutional configuration
explained to a large extent the policy option adopted by different governments (Bonoli
2001). In other words, there seems to be a long term association between higher veto
power and stability on significant issues related to economic policy and welfare. However,
there has been much less attention given to the role of veto power and political constraints
in decisions with a short term view, such as fiscal policy during economic crises. Beside
anecdotic evidence of partisan disagreement, and even contestation using institutional
levers on the size, scope and timing of fiscal packages, a systematic view on the
application of the concept of veto power for this category of policy decisions has been
missing. If numerous and non-aligned political actors with the mutual institutional power
to block each others initiatives have been identified as constituting inhibiting factors to
significant long term policies, perhaps a similar mechanism could have been at play in
the case of the short term fiscal intervention during the economic crisis of 2008-2009. The
extent to which this concept adds enough explanatory power to the phenomenon of
discretionary fiscal policy will depend on the sufficiency of complementary explanations
based on intuitive economic determinants. If enough variation is left unexplained after

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carefully accounting for the depth of the economic crisis, the budget constraint, or
ideological preferences of the incumbent government, there can be a good case for
looking at veto power as an important explanation for why governments chose such
different levels of fiscal intervention to address the output gap.

1. Discretionary fiscal policy and the economic crisis

The economic crisis following the financial crisis of 2008 has hit almost all economies but
with varying degrees. There were extreme cases like Ireland or Spain witnessing steep
increases in unemployment, but also milder stories like Poland or Switzerland, with the
crisis having only limited impact in terms of economic growth (Fig. 1).

Figure 1: Decline in economic output and the rise in unemployment between Q1

2008 and Q3 2009.

Source: OECD Factbook 2010: Economic, Environmental and Social Statistics.

However, faced with contagion risks and a near-universal slowdown in economic

activity, nearly all governments resorted to some sort of crisis-driven policy intervention
(Polyvana 2010). Most countries implemented a so-called fiscal package aimed to
complement the support for banks and monetary policy in limiting the duration and depth
of the output gap (OECD 2010). But the magnitude of fiscal policy can only be understood
by looking at its two major components: automatic and discretionary (Dolls et al. 2012).
The former represents the in-built mechanism creating the social safety net that provides

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for income replacement, sustaining consumer spending and breaking the cycle of further
unemployment. They are automatic in the sense that they do not require new decisions
as they kick-in more or less when needed. Their stabilization effect is designed for both
cases of deviation, when economies overheat, they shave the peak through the tax
effect, while in a slump, they release the money back into the economy. All countries have
such mechanisms in place, but they also vary significantly. The discretionary component
constitutes the relatively spontaneous fiscal policy intervention decided by governments
as a reaction to particular circumstances, such as an economic crisis, with the aim of
seeking multiplier effects and restarting economic growth. To some extent, the two
components complement each other, the intuition being that the larger the automatic
stabilizers, the lower the need and the available resources for discretionary fiscal
interventions (Dolls et al. 2012).

Figure 2: Cumulative changes in government balance, 2009-2011, as a percentage

of 2008 GDP.

Source: OECD 2010.

Separating the two components is operationally difficult. The OECD looks at the
government balance and at changes during the crisis period that are cyclical versus the
ones attributed to other policy decisions (OECD 2010). The former represent the direct
effects of the crisis via lower tax income for the government and higher spending on
existing programs, the latter being simply the total effect net of the cyclical effect, aimed

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to capture discretionary measures such as tax cuts or new spending packages. What can
be noticed looking at the OECD data is that even when separating the two components,
significant differences still exist (Fig.2).
In other words, even when accounting for the complementary relation between
automatic stabilizers and discretionary policy, the size of the fiscal intervention altogether
is surprisingly different across countries. Some of the reasons behind these differences
have been explored theoretically (Arbatli et al. 2014). They can be grouped into three
categories: need, possibility and willingness.
Governments will decide on the scope of their interventions proportional to the size
of the problem they intend to address. Therefore, one immediate explanation behind this
variation is that some countries were affected more than others and, as a result, needed
fiscal policy interventions of greater magnitude. A country where the size of the economic
contraction and the rise in unemployment are low will naturally require less of an effort in
propping up the economy.
Further yet, some countries may simply have more leeway in terms of policy
decision, irrespective of how needed or wanted those decisions are. In countries where
government debt and budget deficit levels spiralled out of control, with limited or no
access to financial markets and no help from international financial institutions, the size
of the fiscal package can only be assumed to be lower (Arbatli et al 2014). Hence, fiscal
space, broadly understood, provides another natural explanation of the difference in
policy interventions.
Finally, the extent to which governments consider fiscal policy as the right tool for
addressing decreased economic activity and rising unemployment may also vary. The
intense debates regarding the effectiveness of deficit spending on limiting the duration
and depth of the crisis serve as an illustration for this difference. It may simply be the case
that governments controlled by certain parties, dominated by a particular ideological view
chose not to intervene using the tools of discretionary fiscal policy or to do so to a lesser
degree.
In light of the above-mentioned relation between institutional veto power and the
capacity of governments to decide on large-scale policies, one could argue that even
when governments have the need, the resources and the willingness to act, they may be

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hindered by the particular institutional configuration. In other words, another explanation

for the difference in size of the discretionary fiscal policy intervention during the crisis may
lie with the different levels of veto power embedded in the countries constitutions.

2. Empirical exercise

Methodology
To explore the potential link between veto power (political constraints) and discretionary
fiscal spending in the period between 2008 and 2009, a limited empirical exercise will be
suggested. First, some of the various ways of measuring veto power will be explored and
an operational definition based on the notion of political constraints developed by Henisz
will be made. Afterwards, a definition of the dependent variable will be sketched, with
particular attention at separating the discretionary and automatic components. The most
convincing determinants of fiscal packages will be also given an operational form, to be
included as control variables. Some descriptive statistics based on the sample of 46
economies will be presented throughout the section. Finally, the results of the OLS model
and its limitations will conclude the empirical exercise.

Veto power and political constraints

The intuition behind notions such as political constraints or veto points is straightforward.
There are certain constitutional or contingent features of polities that simply create a more
difficult process of decision making due to the multiple stages at which they can be
delayed or blocked. However, a consistent operational definition is needed if comparisons
between countries are to be attempted.
The definition could be simply based on the number of political parties in
Parliament in any given period of time (Tsebelis and Chang 2004). Having more parties
would entail greater political fragmentation, typical for favouring the formation coalition
governments, lengthy negotiations for consensus and, ultimately, a more laborious
decision making process. In addition to that, the ideological dispersion between parties is
thought to be a further impediment to policy change, adding to the effect of the number
of parties.

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On the other hand, veto points can be purely institutional, such as federalism,
bicameralism, or presidentialism. These represent objective constraints to decision
making, with explicit veto power given to various branches of government.
However, the indicator to be used in the empirical exercise here is built on the concept of
political constraints (Henisz 2004). Based on political risk from a business stability
perspective, the notion of political constraints emerges as a safeguard against the
possibility of disruption in decision-making. Thus, Henisz creates the political constraints
index measuring the extent to which one political actor (such as the executive, legislative,
etc.) is constrained in the choice of future policies. The indicator starts from the number
of branches of government with veto power over policies and adds a partisan alignment
dimension by looking at the composition of lower houses of Parliament, the lower the
alignment the lower the chance of success for a political initiative. Finally, a measure of
heterogeneity is also included in conjunction with each of the political actors. The index
ranges from no constraint (0) to highest constraint (1) and is available for a large selection
of countries. In our sample of countries, the index takes values between 0, in China or
Kazakhstan, where there are basically no political constraints, and 0.72 in Belgium, a
country with a large number of veto points, with a mean of 0.37 and a standard deviation
of 0.16.

3. The dependent variable

The starting point of this article was the intriguingly large difference in fiscal policy
response between countries that experienced a significant economic slowdown in 20082009. Part of this difference stems from the presence of automatic stabilizers, which are
by design of various magnitudes and have little to do with contingent political decisions.
However, breaking down the automatic and discretionary components of fiscal policy, we
still see large differences among the latter. This will be the dependent variable of interest
here, but its definition is in no way straightforward.
In order to separate fiscal policy between the two inversely correlated components,
several methods have been advanced (Aizenman and Jinjarak 2012; Dolls et al. 2012).
One of these methods builds an income stabilization coefficient capturing the relation
between total market income and disposable income, thus estimating the tax and transfer

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response to changing economic performance (Dolls et al. 2012). Carving out the
automatic stabilizer effect from total fiscal policy would thus identify the ad-hoc policy size.
Another method, the one used by the IMF, relies on simply observing the change
in Government budget balance, which can be further separated into a cyclical and a noncyclical component, the latter being the fiscal package our discretionary fiscal policy
variable. Being available for a large number of countries and having a relatively intuitive
definition, the IMFs non-cyclical budget balance will be the dependent variable for the
purpose of this model. The fiscal stimulus variable ranges from 0.22% of GDP to 13.83%
of GDP, with a mean of 3.52 and a standard deviation of 3.03.

Control variables
As mentioned earlier, there are a number of country characteristics that may justify the
difference in discretionary fiscal policy enacted during or in the aftermath of the economic
crisis of 2008. And these can be divided into three major categories: need, capacity and
willingness.
In order to grasp the need for policy intervention, four major indicators will be used.
The severity of the crisis will be gauged by looking at the evolution of GDP per capita
between 2008 and 2009 as well as unemployment rate dynamics during that period.
Countries with deeper slumps and soaring unemployment should be naturally more
determined to take action, including fiscal policy initiatives. Conversely, where automatic
stabilization is built-in and is well defined to match the signals of the economic crisis, the
need for further fiscal policy decisions becomes less stringent. For the latter, given the
low data availability for a large sample of countries, an approximation will be needed. It
has been shown that government size expressed as a percentage of GDP reduces output
volatility, thus being highly correlated with automatic stabilizers (Fatas and Mihov 2001).
Hence, government spending as a fraction of GDP will be included in the model as a
proxy for automatic stabilizers. In addition, based on the relatively uncontroversial
assumption that financial openness creates vulnerability to shocks, deeper crises and
longer recoveries, it would be worthwhile exploring its relationship with the size of the
fiscal package (Reinhart and Rogoff, 2008). To this purpose, the capital account
openness index developed by Chinn and Ito and available for a large number of countries

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will also be included in the model (Chinn and Ito, 2006).

With respect to capacity, the extent to which there is available fiscal space for such
policy measures is crucial in determining the government reaction. As a measure of fiscal
constraint, following Aizenman and Jinjarak, an indicator with more explanatory power
than the level of government debt to GDP will be built (Aizenman and Jinjarak 2012). In
order to capture the capacity of governments to service their debt, the stock of public debt
will be divided by the total government revenue instead of GDP, this ratio being more
illustrative for the fiscal space of a more diverse pool of countries. To complement that, a
variable indicating whether the country was having between 2008 and 2010 a loan
agreement planned with the IMF or the World Bank will also illustrate fiscal space, as the
funds made available by the international financial institutions would definitely make a
difference for the governments capacity to implement a significant fiscal policy
intervention.
Willingness refers mainly to the dominant perception within the government
regarding the suitability of deficit spending as a method of reducing the duration of the
recession. Even in the literature, the size of fiscal multipliers is a matter of debate, which
is also reflected in opposing views along political lines. What can be stated with a
reasonable degree of confidence is that certain patterns of preference can indeed be
identified. It has been shown that left-wing parties tend to prefer counter-cyclical fiscal
policies while right-wing parties have a pro-cyclical stance (Cusack 2001). In the absence
of more refined data for a large number of countries, a dummy indicating a left party
dominated cabinet will be built based on the World Banks database on political
institutions (Keefer and Stasavage 2012). In addition to that, the efficiency of fiscal
packages is seen as depending to a large extent on the openness of the economy, as the
stimulus can leak abroad (Arbatli et al. 2014). Thus, considering the relevance of trade
and currency effects in the effectiveness of the fiscal channel versus export driven
recoveries, a trade openness indicator of the World Bank will also be part of the model.
Moreover, it could be argued that the longer-term level of social spending as a
proportion of GDP may also capture, in part, the countrys stance on economic policy.
Looking at the social policy effort prior to the crisis, we may get important insights into the
propensity of governments to choose larger or smaller fiscal packages to address the

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output gap. For these reasons, the model will also include a social spending as a share
of GDP indicator averaged over 2005 to 2008, where available. Finally, in order to account
for the possibility that fiscal packages were designed under pressure from upcoming
elections, a vote dummy variable set to express whether there were significant legislative
or presidential elections scheduled between 2009 and 2010 will be created.
Two additional controls will be included in order to capture certain economic
specificities. Firstly, an OECD dummy will help identify the behaviour of more advanced
economies. Secondly, Asia, with its more recent experience of financial crisis and
recovery is believed to have a certain proclivity towards counter-cyclical policy (Hur et al.
2010). As such, an Asia continent dummy will be added to the model.

Empirical strategy
The model will consider for each country i, the fiscal package (P i) as being a function of
the political constraints index (Ci) and a vector of control variables (Vi) plus an error term
(ui):

What will be attempted is an estimation of the average effect of political constraints on

the size of the fiscal package, while holding constant other relevant country level
characteristics.

The countries in this sample have been selected based on data availability, since
some of the essential variables for the model, such as automatic stabilizers and
discretionary spending, are difficult to obtain in a comparable fashion for a large number
of countries. Moreover, ensuring that there is sufficient variation and an acceptable
sample size has imposed certain limitations with regard to the definition of the variables.
However, we believe that the diverse countries included are representative for advanced
and medium income economies that have the government capacity to implement effective
fiscal policy when affected by an economic crisis and thus can serve as a good illustration
for why some have chosen larger fiscal packages than others.
The method used will be Ordinary Least Squares with the fiscal package as

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dependent variable, political constraints as the explanatory variable of interest and

relevant controls for the 46 countries in the sample. Given the sample selection, the
definition of control variables and the inherent problem of unobserved factors when
comparing countries, the empirical exercise will not be sufficient for strong conclusions in
favour of clear causal relationships. Nonetheless, a convincing association between veto
power and discretionary fiscal spending, while holding some of the most relevant country
characteristics constant, could shed some more light on the reason behind the different
response of governments to the recent economic crisis.

Results
The main findings are according to the theoretical predictions presented above. Table 1
displays the results of the OLS linear regression model.

Table 1: Regression table including the fiscal package as the dependent variable,
political constraints, fiscal constraints, Asia dummy, OECD dummy, unemployment
change, GDP change, government expenditure, left wing cabinet dummy, capital account
openness dummy, scheduled vote dummy, social spending as a share of GDP IMF/WB
loan dummy and trade openness as independent variables.
***significant at 1%;
**significant at 5%;
*significant at 10%; standard errors in parentheses

VARIABLES
Political constraints
Fiscal constraints
Asia
OECD
Unemployment
Government expenditure
GDP change
Left government
Trade openness
Capital account openness
Social spending
IMF/WB Loan
Elections 09_10

Fiscal package
-5.971853** (3.412773)
-1.333316*** (.3952433)
5.537847*** (1.384069)
2.241627** (1.05478)
-.1691948 (.1756074)
.1506085* (.0885276)
-.1462154 (.1041495)
1.039296 (.8392421)
-.008779 (.0109254)
-1.012044 (1.374014)
-.1818659 (.1424608)
1.41246 (1.427535)
.0870459 (.8134701)

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constant
Observations
R-squared
Source: See Annex 1

3.072343 (3.121734)
46
0.6765

The main intuition of this article seems to be justified by a first look at the data. Political
constraint our measure of veto power is associated with much lower levels of
discretionary fiscal spending with the coefficient being statistically significant. The
average effect is of 5.97 percentage points of GDP, which would suggest quite an
important role for veto power in the fiscal policy response to the crisis. The fiscal
constraint, understood as the capacity of governments to finance their debt and the
implicit room for manoeuvre, is also fitting the expectations with the coefficient being
statistically significant. The average effect of 1.33 GDP percentage point also confirms
the expectation of having lower fiscal packages when the budget constraint is relevant.
The Asia dummy and OECD dummies are also illustrative and highly statistically
significant, substantiating the prediction that the economies with a recent history of crisis
and recovery as well as more advanced economies are more likely to adopt bold deficit
spending measures to limit the output gap. The other variables are not that conclusive.
While the government expenditure, trade openness index, international financial
institutions loans and the presence of leftist parties in government are pointing in the right
direction, the first being also statistically significant, their effects are not conclusive.
Finally, the severity of the crisis based on the evolution of GDP and unemployment, the
long term social spending level as well as elections scheduled in the period do not seem
to fit the predictions.

Conclusions
Faced with a slowdown in economic activity and rising unemployment triggered by the
crisis, governments all over the world resorted to discretionary fiscal policy aimed at
boosting demand and limiting the effects of the crisis. Through a combination of tax cuts
and deficit spending, most countries implemented some sort of counter-cyclical fiscal
package. However, the difference in magnitude between such policies is significant.
Intuitively, such differences can be justified by various country level characteristics, which
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could be grouped into three categories: need, capacity and willingness. A country with a
large economic contraction and rising unemployment will naturally need a more vigorous
policy intervention. Conversely, when fiscal systems have embedded automatic
stabilizers that basically release cash into the ailing economy whenever needed, other
large scale fiscal policies may become less of a priority. However, no matter how greatly
needed such interventions may be, the capacity to implement them depends greatly on
the fiscal space available. Governments facing high costs for financing debt going into
the recession will probably be limited in their policy options. Moreover, disagreement over
counter-cyclical measures and the fiscal multiplier in recessions can simply mean that
some governments may choose not to implement fiscal packages, even if there may be
both need and capacity to do so.
Finally, governments may also be unwilling to pursue discretionary fiscal measures
when having a very open economy, simply because the fiscal multiplier could be lower
than desired, with possible leakage. With all these in mind, an additional possible
explanation has been added for a more complete picture of the discretionary fiscal policy
implementation process and the significantly different outcomes. It has been argued here
that veto power the formal authority of institutional actors to block political initiatives
may provide for a complementary explanation on the difference in fiscal packages. The
capacity of governments to decide on and implement policies that involve large amounts
of resources and dissenting views will greatly depend on the number and relative strength
of veto points embedded in their constitutions. When veto power is large, meaning that
veto points are numerous with significant mutual authority, policy inertia is considered
much more difficult to break. The political constraints index developed by Henisz tried to
approximate this phenomenon by quantifying various political dimensions relevant for the
amount of autonomy a government may have in pursuing important policies. Fiscal
packages during a recession are considered to be a perfect example of such policy, where
the resource commitments are large and implementation can be faced with numerous
hurdles.
To illustrate these relationships, a limited empirical exercise has been attempted
on a cross section of 46 countries using an OLS specification with the size of the fiscal
package as dependent variable, the political constraint index as the main variable of

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interest and country controls for fiscal space, severity of the crisis, trade openness,
economic development and political orientation of Governments. The results have
confirmed the importance of political constraint, higher constraint being associated with a
significantly lower fiscal package, the coefficient being also statistically significant at the
1% level. The fiscal constraint variable and the Asia continent dummy also point in the
right direction and are statistically significant. The other possible determinants
enumerated earlier are less conclusive from the limited empirical exercise. Given the
sample selection, the definition of control variables and the inherent problem of
unobserved factors when comparing countries, the empirical exercise will not be sufficient
for strong conclusions in favour of clear causal relationships. Nonetheless, a convincing
association between veto power and discretionary fiscal spending, while holding some of
the most relevant country characteristics constant, could shed some more light on the
reason behind the different response of governments to the recent economic crisis.
To sum up, it appears that even when accounting for various country level
characteristics, the amount of veto power approximated through the political constraints
index seems to play an important role in explaining the significant difference in terms of
the size of the fiscal packages implemented by countries around the world during and
after the economic crisis of 2008.

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Annex 1
Variables names, definitions and sources.
Variable
Fiscal package (fisc_pac)

Political constraint (pol_con)

Fiscal constraint (fisc_con)

Asia (asia)
OECD (oecd)
Change in unemployment
rate
2009
2007
(unemp_ch)
Government expenditure in
2008 (gov_exp)
GDP per capita growth
(GDP_ch)
Left cabinets (left_gov)
Trade Openness (trad_op)
Elections in 2009-2010
(elections_09_10)

Social spending (soc spen)

IFI loans (IMF_WB_loan)

Capital
account
index
dummy (cap_ac_op)

Definition
Size of the fiscal package as a share of 2008
GDP
POLCON measures the feasibility of policy
change given the structure of a nation's political
institutions (number of veto points) and the
preferences of the actors that inhabit them
(partisan alignment of various veto points and
heterogeneity or homogeneity of the preferences
within each branch). POLCON ranges from 0 (no
constraint) to 1 (high degree of constraint). Year:
2008
Total debt in 2008 divided by total revenue to
give the size of government debt relative to tax
revenue
Continent dummy
OECD membership dummy 2008
Percentage point growth in unemployment rate
between 2007 and 2009
Total government expenditure as share of 2008
GDP
Change in GDP per capita between 2008 and
2009
Dummy for left dominated cabinet: 1 if left party
dominates government, 0 if not.
Sum of imports and exports divided by GDP in
2008.
Dummy variable with 1 if the country had
scheduled elections in the period between 20092010 and 0 otherwise.
Public social protection expenditure (all
functions) as a percentage of GDP [Multiple
sources/ DWI]. Averaged over 2005-2007 (where
available)
Dummy variable with a value of 1 if the country
was either receiving or planning to receive loans
from IMF/WB in the period 2008-2010.
Dummy based on Kopen index, with 0 for
negative values and 1 for positive values. Kopen
is based on four major categories of restrictions
on external accounts: presence of multiple
exchange rates; restrictions on current account
transactions; restrictions on capital account
transactions; requirement of the surrender of
export proceeds (k4). This index takes on higher
values the more open the country is to crossborder capital transactions.

Source
IMF
Political
Constraints
Index Database
Henisz,
Witold
J.
University
of
Pennsylvania, Wharton
School

IMF World Economic

Outlook 2010

OECD
IMF World Economic
Outlook 2010
IMF World Economic
Outlook 2010
IMF World Economic
Outlook 2010
World Bank Database
Political
Institutions
2012
World Bank
IDEA

ILO

IMF, WB

Chinn Ito

143

Romanian Journal of Political Science.

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