Tariff increases over the electoral cycle: A question of size and salience

- This paper studies the effect of politics on water prices in Austria.
- It argues that the political cycle may depend on the size of the policy.
- In contrast to large increases, elections have no effect on small tariff changes.
- This suggests that budget items are not per se salient.

Research on the political budget cycle suggests that some budget items are more visible than others. Accordingly, the cycle will exert a varying impact on policy instruments of different salience. Using a panel data set of tariff decisions by Austrian local governments we identify a stable and sizable electoral cycle in water tariffs. Tariff increases are both less frequent and less strong before elections. The cycle effect is, however, not constant: Small increases are not affected by elections or even more likely. This is consistent with advances from prospect theory suggesting that visibility may depend on the size of a policy. Consequently, small tariff changes may not be salient, particularly if they are below inflation as a reference threshold.