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On Local Government Spending and Taxation Behaviour - effect of population size and economic condition

  • Antti Moisio

This paper examines the Granger causality between total expenditures, own source revenues, grants received from the State and long-term loans for 12 subgroups of Finnish municipalities. Two panel data sets that cover the years 1985-1992 and 1993-1999 are used in order to compare the effect of change from a system of matching grants to formula-based grants. The main findings are that the grant system reform has resulted in more careful economic decision-making among the municipalities. For instance, the largest municipalities that used to have "spend and tax" causality now have "simultaneous" causality between expenditures and revenues. Another finding is that the smallest municipalities seem to be careful in their budgetary process irrespective of the grant system. The implications of the results are that the reaction to specific central state measures may differ considerably between separate groups of municipalities. The differences should be taken into account before making any important changes or restrictions that affect municipalities' budgetary variables.

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Paper provided by Government Institute for Economic Research Finland (VATT) in its series Discussion Papers with number 257.

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Date of creation: 09 Jul 2001
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Handle: RePEc:fer:dpaper:257
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  1. Holtz-Eakin Douglas & Rosen Harvey S. & Tilly Schuyler, 1994. "Intertemporal Analysis of State and Local Government Spending: Theory and Tests," Journal of Urban Economics, Elsevier, vol. 35(2), pages 159-174, March.
  2. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1988. "Estimating Vector Autoregressions with Panel Data," Econometrica, Econometric Society, vol. 56(6), pages 1371-95, November.
  3. Abel, Andrew B & Blanchard, Olivier J, 1986. "The Present Value of Profits and Cyclical Movements in Investment," Econometrica, Econometric Society, vol. 54(2), pages 249-73, March.
  4. Holtz-Eakin, Douglas & Rosen, Harvey S, 1991. "Municipal Labor Demand in the Presence of Uncertainty: An Econometric Approach," Journal of Labor Economics, University of Chicago Press, vol. 9(3), pages 276-93, July.
  5. Mankiw, N. Gregory, 1987. "The optimal collection of seigniorage : Theory and evidence," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 327-341, September.
  6. Borge, Lars-Erik & Rattso, Jorn & Sorensen, Rune, 1995. " Local Government Service Production: The Politics of Allocative Sluggishness," Public Choice, Springer, vol. 82(1-2), pages 135-57, January.
  7. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  8. Matz Dahlberg & Eva Johansson, 1998. "The revenues-expenditures nexus: panel data evidence from Swedish municipalities," Applied Economics, Taylor & Francis Journals, vol. 30(10), pages 1379-1386.
  9. Antti Moisio, 2000. "Spend and Tax or Tax and Spend? Panel Data Evidence from Finnish Municipalities during 1985 - 1999," Discussion Papers 242, Government Institute for Economic Research Finland (VATT).
  10. Matz Dahlberg & Eva Johansson, 2000. "An examination of the dynamic behaviour of local governments using GMM bootstrapping methods," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(4), pages 401-416.
  11. Kevin D. Hoover & Steven M. Sheffrin, 1990. "Causation, spending and taxes: sand in the sandbox or tax collector for the welfare state?," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  12. Dahlberg, Matz & Lindstrom, Tomas, 1998. "Are Local Governments Governed by Forward Looking Decision Makers?: An Investigation of Spending Patterns in Swedish Municipalities," Journal of Urban Economics, Elsevier, vol. 44(2), pages 254-271, September.
  13. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
  14. Dahlberg, Matz & Lindström , Tomas, 1996. "Are Local Governments Governed by Forward Looking Decision Makers?," Working Paper Series 1996:20, Uppsala University, Department of Economics.
  15. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  16. Wyckoff, Paul Gary, 1991. "The elusive flypaper effect," Journal of Urban Economics, Elsevier, vol. 30(3), pages 310-328, November.
  17. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
  18. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November.
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