Minority governments and budget deficits: The role of the opposition

Abstract

When governments are in a parliamentary minority they have to negotiate with opposition parties over the annual budget. We argue that, as a consequence, the preferences of the opposition concerning fiscal outcomes should be reflected in the yearly budget balances. We present a theoretical argument in which the opposition faces a trade-off. It has a short-term interest in deficits since they can signal a weak government, but a long-term aversion to them because, if they reach office, they will have to deal with the burden of increased debt. Empirically, we find that opposition parties affect deficit outcomes depending on their probability of governing in the next term and the weakness of the incumbent government. When the opposition is mainly concentrated in one party, it is likely that it will take over the government and this will make the opposition deficit-averse in the current period. However, if the minority government is a coalition, then a concentrated opposition might see deficits as an opportunity to reach office earlier and might be willing to pass budgets with deficit.