Vassilis Sarantides

The Impact of Fiscal Policy on Profits

This paper investigates the impact of fiscal policy on profits using panel data for 19 high-income OECD countries during the period 1975-1999. We estimate a profit equation in which profits depend on a set of fiscal variables. Our empirical method is based on a consistent treatment of the government budget constraint, and we try to disentangle the effects of different spending and taxation items. As far as public spending is concerned, our results strongly suggest that capital expenditures are associated with higher profits, while expenditures on wages and salaries deteriorate profits. At the same time our results indicate that transport and communication expenditures increase profits, while the opposite holds for defense expenditures. On the revenue side, both direct and indirect taxation tend to decrease profits. However, a more detailed sub-division of direct taxation indicates that social security contributions have a neutral effect on profits.

Public Investment and Re-Election Prospects in Developed Countries

A growing body of literature suggests that office-motivated politicians manipulate fiscal policy instruments to enhance their reelection prospects. This article directly examines the impact of fiscal policy on incumbents’ reelection prospects by focusing on the impact of public investment. This impact is estimated using a panel of 20 countries belonging in Organisation for Economic Co-operation and Development over the period 1972–1999. We find that the level of public investment in the earlier years of an incumbents term in office improves their reelection prospects, whereas election year manipulation of public investment is neither rewarded nor punished. Our evidence also suggests that, after controlling for the level of deficit and public investment, the level of government revenue both in the election and nonelection years does not seem to affect reelection prospects. Moreover, we find that deficit creation during elections and in nonelection years are not rewarded by voters.