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Separation of powers and political budget cycles

Political budget cycles (PBCs) arise when the electorate is imperfectly informed about the incumbent’s competence and the incumbent has discretion over the budget. Focusing on the second condition, we study how separation of powers affects PBCs in the composition of government spending. We find that the details of the budget process, namely, the bargaining rules, the status quo’s location, and the degree of compliance with the budget law, are critical for the existence and the amplitudes of PBCs. In particular, when the status quo is determined by the previous budget and there is high compliance with the budget law, separation of powers acts as a commitment device which solves the credibility problems that drive PBCs.