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

Author

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  • Antti Moisio

Abstract

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.

Suggested Citation

  • Antti Moisio, 2001. "On Local Government Spending and Taxation Behaviour - effect of population size and economic condition," Discussion Papers 257, Government Institute for Economic Research Finland (VATT).
  • Handle: RePEc:fer:dpaper:257
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    References listed on IDEAS

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    4. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1989. "The Revenues-Expenditures Nexus: Evidence from Local Government Data," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(2), pages 415-429, May.
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    6. 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., pages 401-416.
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    More about this item

    Keywords

    Local government; Granger causality; spending; taxation;

    JEL classification:

    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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