Do Personal Characteristics of Finance Ministers Affect the Development of Public Debt?

The role of the finance minister differs in various aspects from that of the remaining cabinet members. His main task is to enforce overall budgetary objectives. Depending on the organization of the budget process, the finance minister’s functions range from monitoring and enforcing negotiated budgetary objectives to setting the fiscal agenda for the upcoming years. Apart from his original budget task, the finance minister is not primarily responsible for specific spending projects. This dissolves his incentives to exploit pork barrel projects. Quite the contrary, the finance minister’s institutional function in the cabinet is to resist the emerging spending pressures of his colleagues. The finance minister is thus the cabinet member who has the strongest interest in sound public finance and has a comprehensive view of the budget.

However, while there is a growing literature on the impact of personal characteristics of decision makers on policy decisions in various fields in economics, investigations concerning fiscal policy are still scarce and mostly refer to the personal characteristics of the prime minister. This paper’s innovations are thus threefold: To the best of my knowledge, it is the first description of personal characteristics of national finance ministers in Europe for the period 1980 – 2010. Second, it extends the literature on the determinants of public debt by the, so far, largely neglected impact factors of one of the most relevant decision makers, and third, it is the first investigation which combines personal characteristics of finance ministers with those of their prime ministers.

To answer the question whether personal characteristics of finance ministers affect the development of public debt, I use a unique dataset of personal characteristics of European national finance ministers and their respective prime ministers for the period 1980 – 2010. In a nutshell, the results reveal that especially a finance minister's experience gained in office and his political experience have an impact on the development of public debt: The change of the debt to GDP ratio is negative the more experience a finance minister has gained as a minister of finance or in former positions as a national cabinet member. While the former result suffers from potential endogeneity, several arguments support that the latter result can be interpreted in a causal way. In contrast, a finance minister’s educational background or ideology have no significant impact on public debt changes.

The results are in line with the theory. The institutional function of the finance minister is to resist spending pressures of his cabinet colleagues. It is thus reasonable to assume that those ministers who have a sound understanding of the ways of political decision making have comparative advantages as compared to relatively inexperienced finance ministers. A finance minister who was a national cabinet member before becoming minister of finance has shown his ability to survive in politics. This demonstrates decisiveness and self-assertion which then also reflects in his new position as minister of finance.

Moessinger, Marc-Daniel (2012), Do Personal Characteristics of Finance Ministers Affect the Development of Public Debt?, ZEW Discussion Paper No. 12-068, Mannheim.