Direct Democracy Reduces Public Spending

Direct democracy – the direct involvement of citizens in political decisions – can be an effective tool for cutting public spending, according to research by Professors Patricia Funk and Christina Gathmann.

Their analysis of over a hundred years of data on all the cantons in Switzerland shows that, in addition to increasing the legitimacy of political decisions, direct democracy is a powerful mechanism for reducing overspending by elected officials when voters prefer less spending than their governments.

At a time when the sovereign debt crisis in Europe and North America is raising questions about how to discipline government spending, the study provides lessons from Swiss history since 1890. Among the findings published in the December 2011 issue of the Economic Journal:

  • A mandatory budget referendum that requires citizens to approve costly projects at the ballot box – the construction of a new train station, for example – reduces public spending by around 10%.
  • Voter initiatives that allow citizens to propose new laws also lower public spending. To put an initiative on the ballot, supporters need to collect enough signatures by eligible citizens. The lower such signature requirements, the easier it is for citizens to decide on a political issue at the ballot box. For every 1% reduction in the signature requirement (measured in terms of eligible voters), public spending declines by 0.6%.
  • The constraints imposed by direct democracy at the state level do not result in more local spending. This result suggests that state politicians cannot evade the disciplining effect of direct democracy by simply shifting responsibilities to lower levels of government.

To determine the role of direct democracy for public spending, it is not enough simply to compare public spending in states with direct democracy and states without. The problem is that states might also differ along other dimensions, not just their direct democratic institutions.

For example, the study shows that voters in cantons with strong democracy are fiscally more conservative than voters in other cantons. Therefore, it is important to compare cantons that have very similar characteristics but which differ only in their direct democratic participation rights.

To tackle this issue, the researchers compare the spending behaviour of cantons that recently changed their direct democratic institutions with cantons without any reforms.

They also use variables that help predict the reform of direct democratic institutions. As changes to direct democratic voting rights require a revision of the canton constitution in Switzerland, the barrier to amend the constitution is one determinant of direct democracy.

Politicians might also learn about the effectiveness of direct democracy from their neighbours. Direct democracy in neighbouring cantons is then a second variable influencing the strength of direct democracy in a canton.

This approach shows that direct democracy indeed causes a decline in public spending, though the relationship is weaker than is suggested by the naive comparison of spending across states with and without direct democracy.

''Does Direct Democracy Reduce the Size of Government? New Evidence from Historical Data'' by Patricia Funk and Christina Gathmann is published in the December 2011 issue of the Economic Journal.