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Expenditure Cuts vs. Tax Hikes: Economic Effects of Municipal Consolidation Strategies

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  • Zohal Hessami
  • Maximilian Thomas
  • Georg U. Thunecke

Abstract

This paper investigates the short- and medium-term causal impact of austerity on local fiscal, economic, and political outcomes. We exploit a 2013 state-level austerity program in Hesse, Germany and manually code 2,900 consolidation measures for 86 municipalities, distinguishing between tax- and expenditure-based strategies. Using synthetic difference-in-differences (SDID) estimations, we compare treated municipalities to a control group of 4,630 municipalities in states without an austerity program. Overall, treated municipalities consolidate through tax hikes (business +12%, property +65%) and expenditure cuts (personnel -6%, investments -62%). Austerity generally stabilizes municipal finances but hurts labor markets (number of firms -13% , salaries -9% , jobs -6%). Economic costs vary across consolidation strategies: tax-based consolidation reduces business tax bases and employment, while expenditure-based consolidation depresses apartment rents. Political costs arise only when consolidation relies heavily on a single instrument.

Suggested Citation

  • Zohal Hessami & Maximilian Thomas & Georg U. Thunecke, 2026. "Expenditure Cuts vs. Tax Hikes: Economic Effects of Municipal Consolidation Strategies," CESifo Working Paper Series 12679, CESifo.
    • Handle: RePEc:ces:ceswps:_12679
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    Keywords

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    JEL classification:

    • H39 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Other
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
    • R51 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies

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