The Expenditure Composition and Trade-offs in Local Government Budgets

The fiscal behavior of local governments has gained significant attention from academia and policymakers due to decentralization reforms transferring power from central to lower levels of government. As local governments assume more responsibilities for public goods and services, understanding their expenditure composition and trade-offs becomes crucial. While existing literature has examined the factors influencing the size of local government budgets, less attention has been given to the decision-making mechanisms and trade-offs within budget allocations. This study investigates the expenditure composition of 300 Flemish municipalities, using an unsupervised clustering algorithm and a binary logistic regression framework. Our results are indicative of how local governments tend to prioritize specific policy areas in the design of their budgets, when they operate under strict institutional and fiscal constraints such as a balanced budget rule. We observe that municipalities prioritizing social care for the elderly allocate fewer resources to education, mobility, and environmental initiatives. Municipalities emphasizing administration services, mobility, safety, and social services sacrifice both care services for the elderly and have reduced budgets for primary education. The budget composition patterns are influenced by the age structure and ethnic diversity of local communities and the politico-ideological position of electorates.