Political uncertainty, public expenditure and growth

We set out an infinite-horizon political economy model with partisan and office motivation effects in an endogenous growth context to demonstrate that the existence of political uncertainty regarding re-election tends to reduce the amount of public investment by incumbent governments and underlies a switch from government investment to government consumption, thereby reducing growth. The political equilibrium is inefficient and so does not maximise social welfare. Using panel data regressions we show, for OECD countries, that there is empirical support for the hypothesis that political uncertainty tends to reduce public investment, and that there are partisan effects in public investment decisions.