Fiscal policy much looser, slippages much larger in election years, says IMF
The IMF in its April 2024 Fiscal Monitor Report, reveals a clear pattern of looser fiscal policy and larger fiscal slippages during election years, a phenomenon it describes as a “political budget cycle.”
According to the report, deficits in election years tend to be 0.3 percentage points higher as a share of GDP compared to non-election years.
The increased deficits are attributed to both higher government spending and reduced revenues, by approximately 0.2 and 0.1 percentage points of GDP respectively.
Moreover, the report highlights that realized deficits often surpass year-ahead projections by 0.4 percentage points of GDP, posing significant risks to the modest fiscal tightening anticipated for most economies in 2024.
These fiscal slippages, the IMF further notes in the report, could exacerbate inflationary pressures, particularly in economies already experiencing overheating. While the IMF notes that higher deficits during election years are often followed by fiscal adjustments in the subsequent post-election years, these adjustments are typically only partial.
The increased fiscal volatility surrounding elections could, therefore, have adverse effects on long-term economic growth.
The IMF asserts that the record number of elections being held across the world this year represents a salient risk with regard to fiscal consolidation prospects for the year.
A total of 88 economies or economic areas have either held or are expected to hold nationwide elections, including major economies such as Bangladesh, Brazil, the European Union, India, Indonesia, Mexico, Pakistan, Russia, the United Kingdom, and the United States.
These economies represent more than half of the world’s population, or 4.2 billion people, and account for 55 percent of global GDP.
