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The dynamic adjustment of local government budgets: Does Spain Behave differently?

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  • Albert Sole-Olle
  • Pilar Sorribas-Navarro

    (Universitat de Barcelona)

Abstract

The aim of this paper is to analyze whether Spanish municipalities adjust in response to budget shocks and (if so) which elements of the budget they are more likely to adjust. The methodology we use to answer these questions is a vector error-correction model (VECM), estimated with data from a panel of Spanish municipalities during the period 1988-2006. Our results confirm, first, that municipalities do indeed make adjustments in response to fiscal shocks (i.e., the deficit is stationary in the long run). Second, we find that most of the adjustment to a revenue shock is borne by the municipalities themselves as they proceed to cut expenditures, with a minor role being played by grant financing. By contrast, adjustments to expenditure shocks are shared on largely equal terms by the municipality through the raising of taxes and higher tiers of government through the raising of grants. These results suggest that the viability of the local finance system is feasible with different institutional arrangements.

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Bibliographic Info

Paper provided by Universitat de Barcelona. Espai de Recerca en Economia in its series Working Papers in Economics with number 226.

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Length: 0 pages
Date of creation: 2009
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Handle: RePEc:bar:bedcje:2009226

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Postal: Espai de Recerca en Economia, Facultat de Ciències Econòmiques. Tinent Coronel Valenzuela, Num 1-11 08034 Barcelona. Spain.
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  14. Jordi Jofre-Monseny & Albert Sole-Olle, 2010. "Tax Differentials in Intraregional Firm Location: Evidence from New Manufacturing Establishments in Spanish Municipalities," Regional Studies, Taylor & Francis Journals, vol. 44(6), pages 663-677.
  15. Wildasin, David E., 1997. "Externalities and bailouts : hard and soft budget constraints in intergovernmental fiscal relations," Policy Research Working Paper Series 1843, The World Bank.
  16. Albert Solé-Ollé & Elisabet Viladecans-Marsal, 2007. "Economic and political determinants of urban expansion: Exploring the local connection," Working Papers 2007/5, Institut d'Economia de Barcelona (IEB).
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Cited by:
  1. Benny Geys & Federico Revelli, 2011. "Economic and political foundations of local tax structures: an empirical investigation of the tax mix of Flemish municipalities," Environment and Planning C: Government and Policy, Pion Ltd, London, vol. 29(3), pages 410-427, June.
  2. Andreas Kappeler & Albert Solé-Ollé & Andreas Stephan & Timo Välilä, 2012. "Does fiscal decentralization foster regional investment in productive infrastructure?," Working Papers 2012/32, Institut d'Economia de Barcelona (IEB).
  3. Albert Solé-Ollé & Elisabet Viladecans-Marsal, 2011. "Local spending and the housing boom," Working Papers 2011/27, Institut d'Economia de Barcelona (IEB).

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