Domestic politics and the fiscal response to the COVID-19 pandemic in EU and OECD countries

Abstract

The fiscal policy response to the COVID-19 pandemic was strong and unprecedented. Yet, even though the economic shock was relatively similar, there were large variations in the magnitude of the budgetary support across countries. Drawing on the literature of the political economy of budget deficits, this paper focuses on the role of political determinants to explain the variation in the size of the fiscal response to the pandemic among the 27 members of the European Union and 16 other OECD countries. The political factors, as well as control variables that are relevant to the COVID-19 shock, are included in a conceptual framework that comprises the need for fiscal response, government’s fiscal space as well as its effectiveness. Using a cross-sectional model, results across different model specifications show that domestic politics did matter. In particular, government fragmentation, as found in coalition governments, results in smaller fiscal packages, reflecting difficulties to agree on the fiscal package. In contrast, a larger parliamentary majority facilitates the passage of the relevant legislation and is associated with a larger budgetary response. Similar results were also found for broad coalitions with super-parliamentary majorities and when the executive has control over the relevant parliamentary chambers. On the other hand, the timing of elections and partisan politics did not influence the size of the budgetary response to the pandemic. Besides political factors, the availability of fiscal space was another important determinant of the magnitude of the fiscal package, although the more relevant factors were access to market financing and the cost of government borrowing, rather than the level of government debt. Finally, the findings also show that more stringent containment measures, the level of income per capita and the share of the elderly in the population are generally associated with larger fiscal responses to the pandemic.