Fiscal Windfall Curse

Simon Berset and Mark Schelker

No 7795, CESifo Working Paper Series from CESifo

Abstract: We study the impact of a one-off exogenous fiscal windfall on local public finances in the canton of Zurich in Switzerland. In contrast to much of the literature of resource windfalls, the windfall occurred in a stable democracy with strong fiscal institutions. It was due to the IPO of Glencore on the London Stock Exchange in 2011. As a result, its CEO paid an extraordinary tax bill of approximately CHF 360 million. About CHF 238 million of that extra tax revenue entered the municipal resource equalization scheme and rained down on the municipalities of the canton of Zurich. This quasi-experimental setup and our unusually rich dataset allow us to estimate the causal effect of this one-off windfall on all municipal accounting positions. We show that it triggered large, permanent expenditure increases targeting specific groups (mostly public employees) at the same time as general tax cuts and user charge hikes. The resulting imbalances caused a 7.5-fold increase in gross debt relative to the windfall. This massive overreaction hints at a substantial fiscal windfall curse, even with strong fiscal institutions.

Keywords: local public finance; fiscal windfalls; fiscal policy (search for similar items in EconPapers)
JEL-codes: D70 H11 H71 H72 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-eur and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Fiscal windfall curse (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_7795

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