The impact of proportional representation and coalition government on fiscal policy

Type: Think Pieces Written by James Paton | Monday 18 April 2011

Many claims are made about the impact of voting systems on government fiscal policies, but what does the international evidence say? In this think piece, James Paton assesses the impact of coalition government and systems of proportional representation on government fiscal policies in five different countries, and discusses the implication of his findings for the US.

Introduction

For many years, there have been calls to change the electoral system within the UK from First-Past-the-Post (FPTP) to a more proportional system. This has featured in successive Liberal Democrat (formerly the SDP/Liberal Alliance) manifestos, as the FPTP system favours a two party system as the percentage of votes does not reflect the number of seats won in Parliament.

At the 1983 election, the Conservatives won 42.4%, the Labour Party won 27.6%, and the SDP-Liberal Alliance a combined total of 25.4% of the proportion of the vote respectively. In terms of seats won, the Conservatives took 61%, the Labour Party took 32.2%, and the Alliance took 1.8% of seats respectively. This distortion of vote leads to a higher chance of a single party government forming, as each seat in effect is a separate election; the third party, the Liberal Democrats have support dispersed across the country and where support is not concentrated enough in seats, they receive a high percentage of the popular vote but a lower proportion of seats.

In a more recent example, the 2010 election saw the Liberal Democrats winning 1% more of the popular vote but losing five seats in parliament. Other smaller parties such as UKIP, BNP and nationalist parties have criticized the system, as the barriers to entry into parliament for them are very high.

The 2010 election produced the first hung parliament since February 1974 and the first coalition since World War II. The Liberal Democrats entered a coalition with the Conservatives thanks to an agreement to hold a referendum on the Alternative Vote (AV). This referendum will be held on May 5th.

Perhaps the strongest argument for FPTP is that the likelihood of forming a single party government is much higher than under proportional representation (PR). Single party overall majority governments are widely seen as being more stable than coalitions. As a single party has a majority within the legislature, a government should be able to push the legislative agenda through. The thinking goes that this should keep faith with credit markets due to the lower chance of the government collapsing, and tighter fiscal policy as the bargaining process involved in coalition formation leads to higher taxes and higher government spending. (In order to buy the support of the various interest groups the negotiating parties rely on.) This has been an area that has not been discussed in detail during the debate around Britain’s possibility of changing the electoral system.

In this think piece, I will examine whether PR is more likely to produce coalitions, and if so, whether coalition governments produce more fiscally profligate governments, in terms of fiscal policy. This will be kept within the years of 1987-2007 before the financial crisis. I will examine five western parliamentary democracies that have systems based on PR to see whether there is evidence suggesting that fiscal policy is looser than in the UK: Greece, Ireland, The Netherlands, New Zealand and Germany.

This of course is not an absolute science as there are a myriad of variables that affect fiscal policy. However the evidence that I explore shows a mixed picture from around the world. From it I will consider what PR could mean for the UK.

New Zealand, from FPTP to MMP:

New Zealand (NZ) is a recent case where a referendum changed the electoral system from FPTP to the Mixed Member Proportional system (MMP). Under FPTP, the elections of 1987, 1990 and 1993 with a legislature of 97, produced majority governments. Labour had a majority of 9.3% in 1990 and the National Party had a 19% majority in 1993. When MMP was introduced in 1996, there have been coalitions formed ever since. Ideologically similar parties (in terms of Left/Right) such as National and NZ First have been formed as well as Labour with parties on the same ideological lines. (See NZ tables from 1996). However, in 2005 a minority coalition of Labour and the Progressives was being supported by NZ First, United and the Greens on a vote-by-vote basis.

The introduction of a PR-style system has not had a significant effect on New Zealand’s fiscal policies. The most striking piece of evidence is that the government has managed to pay off its debt continually since 1998. The ratio of government spending to GDP reached it lowest point in 2004, and has helped the government pay off debt by running budget surpluses. Under the years of FPTP, government ran deficits from 1987-1993, and this suggests that FPTP does not necessarily mean prudent fiscal policy. However, growth was also low during this period.

We must also note government spending has reduced in proportion to GDP when a centre-left coalition was in charge. (See NZ Tables from 1996 to 2005.) Growth was positive and quite smooth between 2000-2007, but the government has not changed its discretionary fiscal policy a great deal, and has not encouraged government spending. This suggests that a single party not having a majority could have restrained spending.

However, in 2005, with the economy still growing and a minority government being supported on a vote-by-vote basis, government spending has increased, but only slightly. This could have been apart of the bargaining process, that FPTP supporters fear, but it has been only slight.

An interesting aspect is long-term bond interest rates. In the 1996–2007 period studied here, they have been relatively stable, suggesting that coalition governments are not necessarily seen as being ‘weak’ by bond markets.

New Zealand

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Fiscal Trends within other Coalitions

The Netherlands:

The Netherlands lower house of 150 seats is elected under a list system of PR. No single party has controlled the legislature since the 19th century. The legislature is fragmented with many parties, holding a more evenly distributed number of seats between the parties. Coalitions are normally under a three party rather than a two party coalition. (See Netherlands tables below.) The ‘Purple Coalition’ ran from 1994 to 1998 and was made up of the PvdA (centre-left), VVD (centre-right) and D66 (social liberal). From 2002, a centre-right coalition was formed with the CDA, LPF and VVD parties. However, since 2006, the centre-right parties, CDA and CU, went into coalition with the PvdA, meaning a left/right coalition government.

The Netherlands is a case where supporters of FPTP will say that looser fiscal policy is apparent. Government spending has been around 56.5% to 45.3% of GDP. Spending has remained above 45% of GDP and could indicate that agreement between the coalition parties has kept government spending high.

Taxation within the economy has remained around 41% to GDP. In 2003, there was another election leading to a liberal to centre-right wing coalition; at this point, long term interests remained constant, suggesting that the market was not concerned about instability within government. Despite having a more economically liberal coalition in place, government spending has remained constant that indicates that more liberal coalitions are not necessarily more prone to tighter fiscal policy.

The remaining area to look at is debt that has fallen over 15 years. This was not to do with government surpluses, as there have been continuous budget deficits.

These indications suggest that relative to the other countries, PR has contributed to a looser fiscal policy in the Netherlands.

Netherlands

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Germany:

Germany has a mixed system, with 323 seats distributed under the Party List system and 299 seats distributed under FPTP. Since the 1990s, Germany has been in coalition; this has been either under the Christian Democratic Union (CDU) and its sister party within Bavaria, the Christian Social Union of Bavaria (CSU), in coalition with the Free Democratic Party (FDP) or the Social Democratic Party (SDP) in coalition with Alliance ’90 and the Greens. The Federal Election of 2005 returned a balanced parliament between the left and right; this led to a grand coalition between the CDU/CSU and SDP with eight out of the sixteen cabinet posts going to each party.

The German case is also a cause of concern for the supporters of FPTP. Government spending to GDP is higher (above 45%), and this has led to a trend of budget deficits. Even with unification between East and West costing a large amount of money, government spending has stayed high in proportion to GDP. Overall taxation itself is below 40%, suggesting that the centre-left coalitions did not mind keeping taxes low, but has kept spending rather high. This has led to German debt to GDP being high relatively to the others in this discussion and it has been increasing since 2001.

Economic growth has fluctuated but has remained steady, suggesting that coalition government has not necessarily meant economic instability in Germany. 

Germany

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Ireland:

Ireland uses the Single Transferable Vote in multi-member constituencies that elects 166 members. This is done on a preference system and has led to constant coalition from 1989, with no single party having an overall majority. Finna Fail and the Progressive Democrats have been coalition partners for a number of parliaments. In 1994, one of the coalitions collapsed after a corruption scandal and this led to a formation of a Rainbow coalition that was formed across the political spectrum (by the centre-right Fine Gael, the centre-left Labour and the socialist Democratic Left). In 2008, a majority coalition of Fianna Fail and the Progressive Democrats was succeeded by a Fianna Fail-Green party coalition. This coalition collapsed in disagreements over the Irish bailout in 2010.

Tax rates and government spending to GDP have been kept relatively low to the others in this discussion. Spending has been below 40% since 1995 and hit record lows by 2000, even when a minority coalition supported by smaller parties. Debt has come down significantly in proportion to GDP with high growth rates and these measures give a good indication that coalition government, even when Rainbow coalition have had a tight fiscal policy. Coalitions have produced high growth per annum and CPI has remained under control, indicating economic stability. (Of course, Ireland’s government also implemented some catastrophically bad economic policies during this period and in the subsequent financial crisis, but its fiscal policies were relatively restrained.)

Ireland

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Greece:

The Greek electoral system has forty-eight multi-member constituencies and eight single member constituencies, with a Parliament of 300 seats. Out of these seats, forty parliamentary seats are reserved under FPTP, and the other 260 seats are distributed under the party list system. In order for any party to have MPs elected to Parliament, a party must receive at least 3% of the proportion of the vote. This system was created to encourage a single party majority and is known as ‘reinforced proportionality’. Since 1990 there have been six elections, and only one has produced a minority government. The average majority of the government is 4.34% and in comparison to the UK, the Greek electoral system has not given such comfortable majorities.

The ratio of government spending to GDP stayed above 40% and tax revenues have remained low throughout the study period. In fact, the tax revenues are the lowest compared to the countries in discussion. However, this is not a convincing case that majority governments are lower taxing; Greece has problems with tax avoidance and this could be a reason for low tax revenues (http://www.ft.com/cms/s/0/b5c198d0-4a9d-11e0-82ab-00144feab49a.html#axzz...). With lower tax revenues to spending, there have been budget deficits pushing government debt to very high levels.

Inflation fell from highs when a minority government was formed in 1990, suggesting that a minority government could not keep inflation under control. Since then, whilst majority governments were in power, inflation dropped significantly and stabilized since 1996.

The financial crisis, which led to Greece becoming the first Eurozone member to experience a sovereign debt crisis thanks to ballooning government debt, has exposed the fatal weakness in the Greek system. The relatively low-tax, high-spend policies that Greece enjoyed during the boom years of the period studied here led to a debt timebomb that has exploded in a spectacular fashion. This may be evidence of coalition governments’ inability to take hard decisions to avoid later catastrophe.

Greece

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UK:

The UK since 1945 has produced majority governments with different sizes; 1974 was the last minority government. Since then, the Conservatives have had vote majorities of 6.7% (1979), 22.3% (1983), 15.7% (1987) and 3.2% (1992); Labour have had majorities of 27.2% (1997), 25.3% (2001) and 12.4% (2005). In 2010, the Conservatives fell short of an overall majority by 21 seats; this was unusual, as FPTP has produced single party governments that have had comfortable majorities.

Single party government has kept taxation and spending to GDP relatively low to the other countries. However, budget deficits have been common and have been funded by increases in government debt and suggest that majority government does not necessarily mean tighter fiscal policy.

Growth has been stable steady and inflation has been stable since 1993. Long-term interest rates have been on a downward trend, since the early 1990s recession and these variables indicate that majority government has given economic stability.

UK

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Different systems of PR and the coalitions produced:

Opponents of PR believe that it is more likely that a coalition government will be formed, as no single party will have an overall majority within the legislature due to no single party obtaining more than 45% of the vote. (I have used 45% as a rough figure rather than 51%, as the variants of PR do not necessarily mean that a party needs 51% to obtain a majority as in Greece.) Within the five countries that I have examined, this seems to be the case.

These western parliamentary democracies have a variant of a PR system. Greece, with a ‘reinforced proportionality’ mantra, has produced majority governments. However, these majorities have been slim and not as strong as those under the FPTP system in the UK and New Zealand (when using FPTP). Germany, the Netherlands, New Zealand (since 1996) and Ireland have all had coalitions.

The facts are clear that PR systems are more likely to produce coalition government and the opponents of PR are right to suggest this. However, it does not necessarily mean that single majority party governments are more prudent with their fiscal policy.

Legislature sizes, variants of PR and the distribution of seats:

An interesting observation to make is the link between, the variant of PR system, the distribution of seats within parliaments and the size of the legislature.

It seems that a coalition in a smaller legislature has tighter fiscal policy. Ireland, with a lower house containing 165 voting members, has had coalitions with tight majorities and in some cases been in a minority situation. This has also been the case with NZ; with only 120 representatives, spending has reduced since FPTP, and taxation has fluctuated little.

In contrast to Germany with a legislature of 622, there seems to be a looser fiscal policy. One of these reasons could be that there are more people needed to keep on side and therefore spending has to be higher to satisfy them; they also may have demanded lower taxes. Having taxes lower than spending has caused a number of budget deficits raising the government’s debt. This can be seen with Greece; it is double the size of the Irish Parliament, and has had a majority in five out of six elections. However it has continued with a looser fiscal policy.

The outlier is the Netherlands with a parliament of 150 members. Government spending and taxation is relatively high in comparison to the other countries. However the Dutch have a much more fragmented parliament and coalition governments are made up with more than two parties. This is because of the variant of PR; the Dutch electoral system produces a myriad of parties in Parliament with a share of seats that is more evenly distributed across them. The Dutch electorate vote for a wider range of parties that leads to a more even distribution of seats across parties. However, in comparison to the other countries, the percentage of vote won is roughly the same as seats won. This suggests that the variant of PR could change voting intentions and for the Netherlands, coalition bargaining could have caused higher spending and taxation.

The German, NZ and Greek parliaments have an election system that is hybrid. Two (and sometimes three) parties receive a large share of the seats and the other parties receive a less even distribution of seats in comparison to the Dutch parliament. This showing the variant of PR is an important factor in this discussion.

The areas of variant of PR, size of the legislature and distribution of seats across the parties could be factors in determining fiscal policy.

What this could mean for the UK in Coalition and her fiscal policy:

The introduction stated that this is far from being an exact science and this section is truly speculative. The first problem is that people may vote tactically to keep a party out of a seat or protest vote in reaction to dissatisfaction of the main parties. If under a more proportional system, the electorate’s voting intentions may have changed and this is difficult when looking at the percentage vote of past election results.

If the UK were under a very proportional system like the Netherlands, there might have been two large, one medium and a few small parties surrounding them from 1987-2005. This is very similar to the Irish lower house as there are large centre parties with other smaller parties around them. However the UK parliament is large like the German house that suggests that due to the large number of seats, fiscal policy could be a lot looser due to the influence of backbenchers.

Since 2005 there has been a change from voting for the mainstream parties. This may have been down to the unpopularity of Labour and the Conservatives, leading to more protesting voting. Parties such as UKIP, Green and the BNP would have entered parliament as they received enough votes. This would have had little effect on governments, as the size of their vote was very small. From the analysis of the other countries, this would suggest that under a system of Dutch PR, the UK would have had fiscal policy following the German model due to the size of the legislature.

If the UK used a PR model closer to Germany and New Zealand, the UK would probably have had governments that had slimmer majorities. This would imply a Greek model of governance, as the Greek legislature is larger than the others apart from Germany. This suggests that government spending to GDP increasing and a looser fiscal policy. The 1992-1997 Parliament had a government majority of 20, and in this case, spending did reach a higher proportion to GDP. However the UK economy was recovering from the 1992 downturn and the government may have been stimulus spending at the time.

There is no definite conclusion possible from this evidence, but for the UK, a system of PR would seem more likely to produce results along the lines of Germany’s fiscal policy, with a large legislature dominated by big parties and with a larger parliament, which may have increased the UK’s governments spending overall.

Summary:

From the Western parliamentary democracies that use a system of PR, there is ambiguity as to whether fiscal policy is less under control in coalition in comparison to single majority party government. The move from FPTP to MMP in New Zealand reduced government spending and debt to GDP indicates tighter fiscal policy.

This think piece has identified a number of potential reasons that may have caused coalitions to have tighter or looser fiscal policy. It seems that the variant of PR being used, the size of the legislature and the distribution of seats to parties affects fiscal policy. This is seen in the Netherlands, where the system of PR is very proportional and may encourage the electorate to vote for other parties. This leads to a more equal distribution of votes across parties. Coalitions are formed from three parties and where there is spending taxation are high to GDP, it would suggest that the bargaining process has led to looser fiscal policy. Ireland, with a small parliament, two or three large parties and a number of small parties, has seen relatively prudent fiscal policies whilst in coalition (prior to the financial crisis). Germany, with a hybrid system and a big parliament, produces two big parties and three smaller parties. It seems to have produced higher government spending and the factors of variant of PR, the size of legislature and distribution of seats could be influencing what control a coalition have over fiscal policy.

Coalition governments are normal to countries that have PR systems. They do not necessarily mean looser fiscal policy and it has not shown that they cause economic instability to markets.

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