Decoding Local Public Finance: The Interplay of the Legislature and the Executive

In the world of government and politics, the interaction between the executive and the legislature raises a fundamental question: Does a larger political class enhance public finance by boosting revenues, or does it constrain expenditures and financial stability? Using unique administrative data from Italian municipalities and a generalized difference in-difference strategy, this paper explores the fiscal impact of the roles that politicians play in local government. The study finds that a larger executive leads to increased expenditures, primarily driven by higher investments financed through capital transfers, while a larger legislature tends to constrain public spending. These patterns are understood by examining the role of specialization within a broader executive entity and the political divisions that figure within a larger council. Voters respond positively to additional spending by the executive, supporting upward career movement for the mayor and the reappointment of executive board members. On the other hand, councilors’ careers do not benefit from liberal spending behavior. This research contributes to the understanding of the complex relationship between political class size and state finances, a relationship which the literature has found to be ambiguous.