Lame duck politicians and fiscal policy

Does the introduction of term limits affect policymaking? Elections have a salutary disciplining effect as long as they urge politicians to act on behalf of the electorate. If politicians place too high a value on holding office, consequences may yet be pernicious. To boost their probability of re-election, politicians may end up favoring policies that are popular among voters instead of those they would otherwise promote. Once ineligible, they have fewer incentives to please the electorate. Consequences for policy hinge on the extent to which voters’ and politicians’ preferences diverge.

A 2006 bill introducing a limit of three terms for mayors in Portuguese municipalities provides an ideal setting for comparing the behavior of ineligible and re-eligible officeholders. Compared to incumbents able to run for re-election, term-limited mayors cut expenditures and reduced the local property tax rate during the electoral term leading to the 2013 elections. Further investigation shows that this behavior reflects the choices of right-leaning, term-limited mayors. Right-leaning mayors reaching the end of their tenure lowered current spending by 6.8%, with personnel expenditures accounting for 80% of the overall reduction. On the revenue side, they bore a 7.4% loss in total tax revenues after lowering the property tax rate. Left-leaning and independent incumbents, in turn, did not alter their fiscal policy once ineligible to run again.

The differences across the ideological spectrum most likely ensue from the differences in preferences that lead politicians to select into different parties in the first place. The findings are consistent with re-eligible, right-leaning politicians catering to voters’ preference for redistribution to boost their probability of re-election. When no longer eligible for office, though, right-leaning mayors behave more truthfully, implementing more conservative policies. Left-leaning politicians, whose redistributive preferences match those of the electorate, lack incentives to change past policy decisions when barred from running for re-election.

Click here to go to the paper by Mariana Lopes da Fonseca.