Intergovernmental grant rules, the "golden rule" of public finance and local expenditures
The Stability and Growth Pact and the process of fiscal consolidation in several European countries have enhanced the role of fiscal rules at sub-national level. This paper analyzes the combined effect of a rule to allocate capital and current block grants to local governments and the “golden rule” of public finance (surplus of current balance). We argue that the two fiscal rules introduce significant rigidities and distortions in local governments’ expenditures structure since these mimic the structure of revenues. This effect is particularly relevant in municipalities that are more dependent of intergovernmental grants, mainly rural. On the other hand, urban municipalities with greater tax revenues (current revenues) are constrained in their ability to make capital investments because they receive per capita capital grants below what economies of scale would suggest. An empirical analysis of Portuguese local governments shows that it is no longer the median voter, but fiscal rules, that command the broad pattern of expenditure (current versus capital) at a local level. This paper is a contribution to the literature on the perverse effects of fiscal rules.
|Date of creation:||Jul 2008|
|Contact details of provider:|| Postal: Department of Economics, ISEG - School of Economics and Management, University of Lisbon, Rua do Quelhas 6, 1200-781 LISBON, PORTUGAL|
Web page: https://aquila1.iseg.ulisboa.pt/aquila/departamentos/EC
When requesting a correction, please mention this item's handle: RePEc:ise:isegwp:wp422008. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Vitor Escaria)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.