Antoni Castells () (Institut d'Economia de Barcelona (IEB); Universitat de Barcelona (UB)) Alejandro Esteller () (Institut d'Economia de Barcelona (IEB); Universitat de Barcelona (UB)) Maite Vilalta () (Institut d'Economia de Barcelona (IEB); Universitat de Barcelona (UB))
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By means of a dynamic panel data analysis, and using a database from municipalities of the province of Barcelona (1993-99), we describe their process of fiscal adjustment to a shock in tax capacity. About 25% of the shock is internalized through an increase in tax effort, 35% through a reduction in public expenditure (mainly investment), while the rest is covered by an increase in the level of debt (i.e., the adjustment is delayed). However, this process of adjustment is very much influenced by the political situation of the municipality. Coalition and minority governments ("weak" governments) tend to delay the (unavoidable) adjustment, and 70% of their shock is covered by an increase in the level of debt, while the rest of municipalities ("strong" governments) adjust immediately. Leftist governments mostly react through increases in tax effort, while rightist governments reduce public expenditure to a greater extent. Finally, we find that municipalities are relatively reluctant to decrease taxes, that is, they react differently to a negative (28%) and a positive (26%) shock with regard to the level of tax effort.
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Paper provided by Institut d'Economia de Barcelona (IEB) in its series Working Papers with number
2004/3.
Find related papers by JEL classification: D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy-Making and Implementation H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures