Politics and financial management: a long-term evaluation on Spanish local governments

Fiscal outcomes stem from the interaction of economic and political circumstances at the subnational level: divided government, institutions and party control. Thus, socio-economic factors (population, economic level) are not sufficient to explain public sector behaviour, but the political background also plays a role. In this line of research, theoretical and empirical literature has investigated the impact of the political system, conflicts between decision-makers within governments and ideological differences on governments' financial management. Using this approach, we assess the long-term evolution of local government (LG) expenditures, taxes and balance in Spain. Our aim is to show the impact of ideology and political strength on LG finances. According to the literature, we also consider economic level and population as socio-economic relevant variables. We apply panel data regressions to 301 LGs for the period 1994-2005. We find that the municipal financial management does not depend upon left/right or political strength, but upon solving people's needs. Economic level and population positively influence the level of expenditures and taxes. Finally, LG balance is independent from our regressors, which stems from the Spanish legal background on LG finances.