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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.

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File URL: http://mpra.ub.uni-muenchen.de/9707/1/MPRA_paper_9707.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 9707.

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Date of creation: 2006
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Publication status: Published in Israel Economic Review 4.2(2006): pp. 19-52
Handle: RePEc:pra:mprapa:9707
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  1. Henning Bohn, . "Budget Balance Through Revenue or Spending Adjustments? Some Historical Evidence for the United States," Rodney L. White Center for Financial Research Working Papers 28-89, Wharton School Rodney L. White Center for Financial Research.
  2. Thiess Buettner & David E. Wildasin, 2003. "The Dynamics of Municipal Fiscal Adjustment," Public Economics 0309007, EconWPA.
  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. Andrew B. Abel & Olivier J. Blanchard, 1983. "The Present Value of Profits and Cyclical Movements in Investment," NBER Working Papers 1122, National Bureau of Economic Research, Inc.
  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. 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.
  8. 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 415-29, May.
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