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Shadow Budgets, Fiscal Illusion and Municipal Spending: The Case of Germany

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Author Info
Peter Haug
Abstract

The paper investigates the existence of fiscal illusion in German municipalities with special focus on the revenues from local public enterprises. These shadow budgets tend to increase the misperception of municipal tax prices and seem to have been neglected in the literature. Therefore, an aggregated expenditure function has been estimated for all German independent cities applying an “integrated budget” approach, which means that revenues and expenditures of the core budget and the local public enterprises are combined to one single municipal budget. The estimation results suggest that a higher relative share of local public enterprise revenues might increase total per capita spending as well as spending for non-obligatory municipal goods and services. Empirical evidence for other sources of fiscal illusion is mixed but some indications for debt illusion, renter illusion or the flypaper effect could be found.

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Paper provided by Halle Institute for Economic Research in its series IWH Discussion Papers with number 9-09.

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Date of creation: Apr 2009
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Handle: RePEc:iwh:dispap:9-09

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Related research
Keywords: fiscal illusion; municipal enterprises; panel data regression;

Find related papers by JEL classification:
H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
L32 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Enterprises
H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue

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  1. Kalb, Alexander, 2008. "The Impact of Intergovernmental Grants on Cost Efficiency: Theory and Evidence from German Municipalities," ZEW Discussion Papers 08-051, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
  2. Pommerehne, Werner W & Schneider, Friedrich, 1978. "Fiscal Illusion, Political Institutions, and Local Public Spending," Kyklos, Blackwell Publishing, vol. 31(3), pages 381-408.
  3. Rupert Sausgruber & Jean-Robert Tyran, 2005. "Testing the Mill hypothesis of fiscal illusion," Public Choice, Springer, vol. 122(1), pages 39-68, January. [Downloadable!] (restricted)
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  4. Dollery, Brian E & Worthington, Andrew C, 1996. " The Empirical Analysis of Fiscal Illusion," Journal of Economic Surveys, Blackwell Publishing, vol. 10(3), pages 261-97, September.
  5. Dollery, Brian & Worthington, Andrew, 1999. "Fiscal Illusion at the Local Level: An Empirical Test Using Australian Municipal Data," The Economic Record, The Economic Society of Australia, vol. 75(228), pages 37-48, March.
  6. Bergstrom, Theodore C & Goodman, Robert P, 1973. "Private Demands for Public Goods," American Economic Review, American Economic Association, vol. 63(3), pages 280-96, June.
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  7. Wildasin, David E., 1989. "Demand estimation for public goods : Distortionary taxation and other sources of bias," Regional Science and Urban Economics, Elsevier, vol. 19(3), pages 353-379, August. [Downloadable!] (restricted)
  8. Buettner, Thiess, 2003. "Tax base effects and fiscal externalities of local capital taxation: evidence from a panel of German jurisdictions," Journal of Urban Economics, Elsevier, vol. 54(1), pages 110-128, July. [Downloadable!] (restricted)
  9. Epple, Dennis & Romano, Richard E., 1996. "Ends against the middle: Determining public service provision when there are private alternatives," Journal of Public Economics, Elsevier, vol. 62(3), pages 297-325, November. [Downloadable!] (restricted)
  10. Rebecca J. Campbell, 2004. "Leviathan and Fiscal Illusion in Local Government Overlapping Jurisdictions," Public Choice, Springer, vol. 120(3_4), pages 301-329, 09. [Downloadable!]
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