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Budgetary Dynamics in The Local Authorities in Israel


  • Navon, Guy


This study examines the short-run effects and dynamics of exogenous shocks to the regular budgets of the local authorities in Israel with emphasis on the reduction in government participation and taking into account the heterogeneity of the local authorities. To accomplish this, the study uses a panel of 193 local authorities for the years 1996–2002 and estimates a dynamic model for the components of the regular budget. This makes it possible to examine the dynamics of fiscal adjustment in response to changes in the size of the deficit and in the components of the budget. The changes in revenue from municipal taxes and other independent revenues, expenditure and participation and equalization grants were estimated by means of a Vector Error Correction model. The main findings are as follows: (a) Exogenous changes in the components of the budget, such as a reduction in government grants, affect the level of the per capita deficit in the short run but following that the deficit converges to its original level. (b) A reduction in government grants leads to an immediate cutback in services to residents and increased deficits. (c) The process of adjustment in the non-Jewish local authorities is twice as long as that in the Jewish ones. Therefore, the reduction in grants leads to an increase in deficits for a longer period in non-Jewish local authorities. (d) The process of budgetary adjustment differs among local authorities according to socioeconomic ranking. The weakest local authorities (clusters 1-3) and the strongest local authorities (clusters 8-10) respond to a change in the deficit primarily by reducing labor costs while the development town local authorities cut back their services to residents.

Suggested Citation

  • Navon, Guy, 2006. "Budgetary Dynamics in The Local Authorities in Israel," MPRA Paper 9707, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:9707

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    References listed on IDEAS

    1. 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.
    2. Buettner, Thiess & Wildasin, David E., 2006. "The dynamics of municipal fiscal adjustment," Journal of Public Economics, Elsevier, vol. 90(6-7), pages 1115-1132, August.
    3. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
    4. Abel, Andrew B & Blanchard, Olivier J, 1986. "The Present Value of Profits and Cyclical Movements in Investment," Econometrica, Econometric Society, vol. 54(2), pages 249-273, March.
    5. Peter C. B. Phillips & Hyungsik R. Moon, 1999. "Linear Regression Limit Theory for Nonstationary Panel Data," Econometrica, Econometric Society, vol. 67(5), pages 1057-1112, September.
    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., vol. 15(4), pages 401-416.
    7. Bohn, Henning, 1991. "Budget balance through revenue or spending adjustments? : Some historical evidence for the United States," Journal of Monetary Economics, Elsevier, vol. 27(3), pages 333-359, June.
    8. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
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    Cited by:

    1. Jaimes, Richard, 2016. "Estimating Fiscal Adjustments at the Local Level in Colombia," MPRA Paper 75507, University Library of Munich, Germany.
    2. Bessho, Shun-ichiro, 2016. "Case Study of Central and Local Government Finance in Japan," ADBI Working Papers 599, Asian Development Bank Institute.
    3. Bessho, Shun-ichiro & Ogawa, Hikaru, 2015. "Fiscal adjustment in Japanese municipalities," Journal of Comparative Economics, Elsevier, vol. 43(4), pages 1053-1068.

    More about this item


    local authorities; local government; localities; israel; government; guy; navon;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • H6 - Public Economics - - National Budget, Deficit, and Debt


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