Consideration of political fragmentation in terms of public finance

Political actors perform the selection of instruments, which are crucial for the financing of government activities, and the formulation of the framework of fiscal policy. It is still a controversial topic that whether taxes and spending policies of governments in the 1970s aim to provide optimization and stability. This debate has engendered some studies, which put emphasis on the importance of political fragmentation in the formulation and implementation of fiscal policy. This study investigates the impact of political fragmentation on public finance through the panel data analysis, including data from 22 OECD countries between 1995 and 2014. Political fragmentation is studied in four different methods: size fragmentation, ideological fragmentation, institutional and procedural fragmentation and over time fragmentation. Empirical findings in the study show that unlike single party governments, coalition governments with two or more parties, minority governments and caretaker governments are likely to increase public expenditures and to fail to allocate government revenues. This failure causes a negative pressure on the budget deficits. The study states that an increase in the number of ministers in the cabinet results in a relatively small decrease in public revenues and an increase in public expenditures. Furthermore, the study asserts that increase in cabinet's size may complicate the coordination of ministers' demands and have a negative effect on the government budget. The study also claims that a government with the majority of central-minded parties is more disciplined than left-wing and right-wing governments in terms of public finance. The study lastly argues that unexpected change of government, including early elections tend to increase budget deficits. Key words: Public Finance, Political Fragmentation, Budget Deficits, Public Choice Theory, Panel Data Analysis.