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Strategies and consequences of local fiscal consolidation: Evidence from Germany

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  • Fremerey, Melinda
  • Lichter, Andreas
  • Löffler, Max

Abstract

We investigate the consequences of a large-scale fiscal consolidation program for German municipalities. Identification relies on a difference-in-differences approach exploiting political discretion in the program’s assignment rule. We find that targeted jurisdictions improved their fiscal balance by EUR190 per capita and year net of the program-induced grants. Local consolidation strategies differed significantly by population size, which we rationalize with agglomeration economies. Spending cuts and tax increases had little effect on the local economy. However, we detect declines in population levels and house prices as well as electoral backlash in smaller municipalities that disproportionally increased the property tax and cut spending on local public services.

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  • Fremerey, Melinda & Lichter, Andreas & Löffler, Max, 2025. "Strategies and consequences of local fiscal consolidation: Evidence from Germany," Journal of Urban Economics, Elsevier, vol. 149(C).
    • Handle: RePEc:eee:juecon:v:149:y:2025:i:c:s0094119025000579
    DOI: 10.1016/j.jue.2025.103792
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    4. Potrafke, Niklas, 2025. "The economic consequences of fiscal rules," Journal of International Money and Finance, Elsevier, vol. 153(C).
    5. Riedel Nadine & Simmler Martin, 2024. "Fiskalföderalismus in Deutschland – Was zu tun ist," Wirtschaftsdienst, Sciendo, vol. 104(11), pages 747-753.

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    JEL classification:

    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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