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Fiscal consolidation by intergovernmental transfers cuts? The unpleasant effect on expenditure arrears

Author

Listed:
  • Paolo Chiades

    (Bank of Italy - Bank of Italy)

  • Luciano Greco

    (Unipd - Università degli Studi di Padova = University of Padua)

  • Vanni Mengotto

    (Bank of Italy - Bank of Italy)

  • Luigi Moretti

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

  • Paola Valbonesi

    (Unipd - Università degli Studi di Padova = University of Padua)

Abstract

For the period 2003–2014, we investigate unexplored effects of fiscal consolidation in decentralized public finance on a large dataset of Italian municipalities. Based on a simple, realistic theoretical model, we show that municipalities increase arrears on committed investment expenditure as a response to intergovernmental transfer cuts. Then, we test our predictions controlling for potential sources of endogeneity, and find that a reduction in intergovernmental transfers causes a significant increase in arrears, in addition to other common adjustments to local fiscal policies (e.g., tax revenues). Our results highlight a perverse effect of fiscal consolidation packages implemented by centrally imposed fiscal restraints.

Suggested Citation

  • Paolo Chiades & Luciano Greco & Vanni Mengotto & Luigi Moretti & Paola Valbonesi, 2019. "Fiscal consolidation by intergovernmental transfers cuts? The unpleasant effect on expenditure arrears," Post-Print hal-01881787, HAL.
    • Handle: RePEc:hal:journl:hal-01881787
    DOI: 10.1016/j.econmod.2018.09.008
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    More about this item

    Keywords

    Fiscal rules; Instrumental variables; Expenditure commitments; Fiscal federalism;
    All these keywords.

    JEL classification:

    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation

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