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The dinamic adjustment of local government budgets: does Spain behave differently?

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  • Albert Solé-Ollé

    ()
    (Universitat de Barcelona)

  • 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 Institut d'Economia de Barcelona (IEB) in its series Working Papers with number 2009/7.

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Length: 26 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:ieb:wpaper:2009/11/doc2009-7

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Keywords: Fiscal adjustment; intergovernmental transfers; local government.;

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Citations

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Cited by:
  1. Albert Solé-Ollé & Elisabet Viladecans-Marsal, 2011. "Local spending and the housing boom," Working Papers, Institut d'Economia de Barcelona (IEB) 2011/27, Institut d'Economia de Barcelona (IEB).
  2. Andreas Kappeler & Albert Solé-Ollé & Andreas Stephan & Timo Välilä, 2012. "Does Fiscal Decentralisation Foster Regional Investment in Productive Infrastructure?," Discussion Papers of DIW Berlin 1204, DIW Berlin, German Institute for Economic Research.
  3. 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, Pion Ltd, London, vol. 29(3), pages 410-427, June.

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