The revolutions in China’s inter-governmental fiscal system

There were three periods in the development of China’s inter-governmental fiscal system. In the first period (1950s to 1979), local governments collected tax revenues and remitted upward to the central government. Reforms during the next two periods made revolutionary changes to the system. The tax-sharing system (established in 1994) provides for revenue centralization, spending decentralization, and large central transfers to local governments. This system remains largely in force.     

Community Asset Valuations by Non‐profit Government Entities

This paper examines an implication of applying International Financial Reporting Standards to the government sector in Australia. We posit both a self‐interest and a transparency motivation for local governments effecting revaluations of both infrastructure assets and community land. The self‐interest motivation was expected to manifest as a relationship between the amount of revaluation and CEO (or management team) remuneration. The transparency motivation was expected to result in a relationship between revaluation and the extent of spending on these assets, measured as both the quantum of materials and contracts expense, and as the quantum of contracts awarded by the entity above the disclosure threshold. We also speculated that revaluations may be used to signal to state governments a need for additional funds through capital and/or operating grants. At conventional levels of significance, we find no support for these relationships, suggesting that agency motivations at the local government level are either more subtle or non‐existent. As local government authorities in our study follow a reporting framework and standardised accounting procedures prescribed by the state government (in compliance with applicable AASB/IFRS standards), financial and public accountabilities are also likely to be a driver for the valuation of local infrastructure assets at fair value, and this is not likely to be undermined by the opportunistic incentives we have considered.     

Intergovernmental Fiscal Transfers and Local Incentives and Responses: The Case of Indonesia

Indonesian policymakers are convinced that a number of perverse incentives are embedded in their system of intergovernmental transfers. Officials in countries throughout the developing world have similar views about their own intergovernmental frameworks. In Indonesia, perverse incentives are thought to negatively influence a wide range of local government fiscal behaviours, including as regards own‐source revenues, spending and savings. An empirical analysis of the local government response to transfers, however, offers only mixed support for the existence and strength of the presumed incentives. Overall, the findings in this paper highlight the benefits to central governments of rigorously examining assumed perverse incentives in their intergovernmental frameworks before embarking on attempts to expunge them.     

Geographic Cross-Sectional Fiscal Spending Multipliers and the Role of Local Autonomy: Evidence from European Regions

Using a panel of 268 European regions during 1990–2014, we document that the degree of local government's autonomy, measured with the “Local Autonomy Index,” has a significant positive effect on the fiscal spending multiplier. The estimated geographic cross-sectional fiscal spending multiplier is on average close to zero in countries with the lowest degree of local autonomy, and around unity in countries with the highest degree of local autonomy. Multipliers are state-dependent: larger when gross domestic product is below trend and when there is slack in the labor market; in those states, local autonomy has a particularly large positive effect on the multiplier. To interpret the empirical findings, we build a Dynamic Stochastic General Equilibrium (DSGE) model where both local and central government spending contribute to a public good that enhances private labor productivity. Local governments are more efficient in producing the public good and the multiplier is higher in countries where local government spending has a larger share in the production of the public good.     

Fueling fiscal interactions: commodity price shocks and local government spending in Colombia

This paper explores fiscal interactions in a developing country. We analyze whether public expenditures in neighboring municipalities influence local spending decisions within a comprehensive set of expenditure categories. Our analysis is based on panel data covering the universe of Colombian municipalities from 2000 to 2010. We offer a quasi-experimental identification strategy exploiting exogenous variation in municipalities’ exposure to changes in the world market price of oil, depending on the municipalities’ endowment with oil resources and controlling for municipality fixed effects. While we find evidence of strong spatial autocorrelation of total local public spending as well as in almost all expenditure categories, the quasi-experimental approach reveals that there are no significant causal fiscal interaction effects between municipalities. This highlights the importance of using additional sources of exogenous variation for the identification of fiscal interactions. In the developing country context, our findings suggest that fiscal decentralization policies do not lead to a race to the bottom in local public expenditures.     

Financing dies in darkness? The impact of newspaper closures on public finance

We examine how local newspaper closures affect public finance outcomes for local governments. Following a newspaper closure, municipal borrowing costs increase by 5–11 basis points, costing the municipality an additional $650,000 per issue. This effect is causal and not driven by underlying economic conditions. The loss of government monitoring resulting from a closure is associated with higher government wages and deficits and increased likelihoods of costly advance refundings and negotiated sales. Overall, our results indicate that local newspapers hold their governments accountable, keeping municipal borrowing costs low and ultimately saving local taxpayers money.     

Private Equity and Local Public Finances

We study the economic impact of private equity (PE) investments on local governments, which are important corporate stakeholders. Examining over 11,000 deals and private firm data in Europe, we document that target firms' effective tax rates and total tax expenses decrease by 15% and 13% after PE deals. At the same time, target firms expand their capital expenditures and firm boundaries, but do not increase employment. Using administrative data on the public finances of German municipalities and exploiting the geographical and time-series variation in PE deals, we document that PE activity is negatively associated with local governments' tax revenues and spending. This result is likely driven by reduced tax payments of PE portfolio firms, accompanied by only modest positive spillovers of PE investments on regional economic growth. Collectively, our findings suggest that corporate tax efficiency serves as a cost-cutting channel in the PE sector and constrains the finances of local governments.     

How sticky are local expenditures in Italy? Assessing the relevance of the flypaper effect through municipal data

An extensive literature analysed the impact of upper tier transfers on spending behaviour of lower level governments finding evidence of a flypaper effect, an overreaction to varying grants from upper tiers. Our work seeks to supplement a dearth of evidence for the Italian case by focusing on the responsiveness of municipal expenditures to State grants. We use a panel of almost 8,000 municipalities from 1999 to 2006. Budget data are matched with several other information sources, enabling us to investigate also the role played by some important political factors like the electoral cycle or the political strength of local cabinets. Application of panel data techniques with the use of instrumental variables and a dynamic setting highlights the presence of a sizeable flypaper effect and a significant role for political variables while the asymmetric response is not confirmed in all specifications.     

The real impact of a one-off fiscal restriction: empirical evidence of a flypaper effect in Flemish municipalities

This paper analyses the effects of a one-off fiscal restriction on Flemish local government spending. The authors provide evidence of a ‘flypaper effect’: fiscal restriction stimulated the sensitivity of local spending to grants. This means that higher-level governments (regional/national/supranational) need to take a flypaper effect into account when considering one-off fiscal restrictions on lower-level governments.     

Public education spending in a globalized world:

This paper studies the effect of globalization on public expenditures allocated to different stages of education. First, we derive theoretically that globalization’s influence on education expenditures depends on the type of government. For benevolent governments, the model suggests that expenditures for higher education will increase and expenditures for basic education will decline with deepening economic integration. For Leviathan governments, on the other hand, the effects of globalization on public education spending cannot be unambiguously predicted. In the second part of the paper, we empirically analyze globalization’s influence on primary, secondary, and tertiary education expenditures with panel data covering 104 countries over the 1992–2006 period. The results indicate that globalization has led in both industrialized and developing countries to more spending for secondary and tertiary and to less spending for primary education.     

Does the budget process matter for infrastructure spending? Capital budgeting in local government

Investment in long-term capital projects plays an increasingly important role in improving the quality of many public services, as well as promoting economic development. Using data on capital spending and capital budget structures in county governments in Georgia, USA, this paper explains how a separate capital budget protects infrastructure spending in times of fiscal distress. The author found little evidence that county governments with a separate capital budget spent more than those without a capital budget.     

Expenditure Reform in Industrialised Countries: A Case‐Study Approach*

This study examines reforms of public expenditure in industrialised countries over the past two decades. We distinguish ambitious and timid reformers and analyse in detail reform experiences in eight case studies of ambitious reform episodes. We find that ambitious reform countries reduce spending on transfers, subsidies and public consumption. Such expenditure retrenchment is also typically part of a comprehensive reform package that includes improvements in fiscal institutions as well as structural and other macroeconomic reforms. The study finds that ambitious expenditure retrenchment and reform coincides with large improvements in fiscal and economic growth indicators.     

Fiscal Transfers and Fiscal Sustainability

We examine whether the U.S. and German state governments pursue sustainable fiscal policies taking into account fiscal transfers. Using panel data techniques we investigate whether the debt‐to‐GDP ratio had a positive influence on the primary surplus (Bohn model). We show that including/excluding fiscal transfers changes the results. If fiscal transfers are not included in the primary surplus, the test results do not indicate that the U.S. and German state governments pursued sustainable fiscal policies. Our results also suggest that fiscal transfers were positively related to debt. These findings indicate that intergovernmental transfers have implicitly subsidized debts.     

Fiscal Reconstruction and Local Government Financing

This paper investigates the dynamic properties of intergovernmental financing during a fiscal reconstruction process by analyzing the dynamic game among local governments, which operates with soft budget constraints because of concessionary region-specific transfers from a central government. The existence of intergovernmental transfers induces the free-riding behavior of local governments, thereby bringing considerable deficits to the central government. Raising local and/or national taxes is desirable for fiscal reconstruction, but is unable to attain the Pareto-efficient fiscal reconstruction. Taxes on lobbying activities, combined with uniform transfers, induce earlier concession and can attain the Pareto-efficient outcome in the long run.     

Targeting Revisited

Public spending programs aimed at alleviating poverty can eitherbe broadly targeted at categories ofspending or narrowly targetedat types of people. Each approach has benefits and costs tothe poor. It is often claimed that narrow targeting of the poorwill allow governments to reduce pQverty more effectively andat lower cost. But narrow targeting often has hidden costs,and once these costs are considered, the most finely targetedpolicy may not have any more effect on poverty than a broadlytargeted one. Both approaches also have hidden benefits, althoughless is known about their impact. Targeting can help, but itis not a cure-all. Reducing poverty calls for broadly targetedsocial sector spending combined with narrower targeting of cashand in-kind transfers to spec groups. It is also important forgovernments to experiment with schemes that offer better incentives,to carefully monitor the costs and outcomes, and to be flexibleand pragmatic in their policy responses.      

Strategic provision of local public inputs for oligopolistic firms in the presence of endogenous location choice

We develop a model in which two regional governments compete for a mobile oligopolistic firm by providing local public inputs. The central mechanism of our model is the interaction of an agglomeration advantage (partial nonrivalness of the local public inputs) and an agglomeration disadvantage (costs associated with the change of location of firms). We show that a central government of both regions induces an interregionally optimal allocation of firms by providing the optimal levels of local public inputs. The decentralized provision of local public inputs by regional governments, however, leads in most cases to a (interregionally) suboptimal allocation.     

The Keynesian Multiplier Effect Reconsidered

In the standard Keynesian framework, government spending on useless public works has a larger multiplier effect than spending on government transfer payments does. In other words, spending on useless public works increases national income by more than an equivalent increase in government transfer payments would. Nevertheless, their effects on national benefit are identical. For both, the national benefit equals the direct benefit created by the spending. If there are two income classes, some transfers reduce both the national income and the national benefit. Some government purchases completely crowd out private consumption and reduce the national benefit.     

Immigration and local spending in social services: evidence from a massive immigration wave

The aim of this paper is to analyze the relationship between immigration and redistributive public spending by using the recent, massive arrival of immigrants in Spain. Specifically, we focus our analysis on the effect of 1998–2006 changes in local immigrant density on contemporaneous changes in municipal spending in social services. To address the potential endogenous location of immigrants, we adopt an instrumental variables approach that uses the distribution of rental housing in 1991 to predict the location of immigrant inflows. The results indicate that (per capita) social spending increased less in those municipalities that recorded the largest increases in immigrant density. We interpret our results as a reduction in natives’ demand for redistributive public spending.     

Sub-nationals' risk premia in fiscal federations: Fiscal performance and institutional design

The recent debt crisis in Europe highlighted the importance of institutional design and, in particular, bail-out clauses in determining States' risk premia in fiscal or quasi-fiscal federations. This paper examines the determinants of sub-national governments' risk premia in fiscal federations using secondary market data for the USA, Canada, Australia and Germany. It finds that, as for central governments, fiscal fundamentals matter in the pricing of risk, and sub-national governments with higher public debt and larger deficits pay higher premia. However, this relationship is not uniform across federations and it differs with institutional arrangements. In particular, market pricing mechanisms are less effective in presence of explicit or implicit guarantees from the central government. We show that when sub-national governments depend on high transfers from the central government (i.e., when there is some form of implicit guarantee from the center), markets are less responsive to sub-national governments' fiscal fundamentals. Using primary market data, the paper also shows that high transfer dependency lowers the probability of sub-national governments to borrow on capital markets.     

Income Redistribution with Well-Informed Local Governments

This paper examines the problem of redistributing incomeacross jurisdictions and to mobile workers within jurisdictionswhen local governments have better information than the centralgovernment about local production conditions. Under the centralgovernments optimal policy, the subsidies or taxes that localgovernments provide to mobile workers normally depend on whetherthese governments are net recipients or net donors of interjurisdictionalincome transfers. Moreover, the public-input decisions of somelocal governments are distorted. The analysis demonstrates thatit may not be desirable to harmonize social policies across jurisdictions,even when the beneficiaries are quite mobile.