Fiscal consolidation by intergovernmental transfers cuts? The unpleasant effect on expenditure arrears

Paolo Chiades, Luciano Greco, Vanni Mengotto, Luigi Moretti and Paola Valbonesi

Economic Modelling, 2019, vol. 77, issue C, 266-275

Abstract: For the period 2003–2014, we investigate unexplored effects of fiscal consolidation in decentralized public finance on a large dataset of Italian municipalities. Based on a simple, realistic theoretical model, we show that municipalities increase arrears on committed investment expenditure as a response to intergovernmental transfer cuts. Then, we test our predictions controlling for potential sources of endogeneity, and find that a reduction in intergovernmental transfers causes a significant increase in arrears, in addition to other common adjustments to local fiscal policies (e.g., tax revenues). Our results highlight a perverse effect of fiscal consolidation packages implemented by centrally imposed fiscal restraints.

Keywords: Expenditure commitments; Fiscal federalism; Fiscal rules; Instrumental variables (search for similar items in EconPapers)
JEL-codes: C33 C36 H30 H72 H77 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: Fiscal consolidation by intergovernmental transfers cuts? The unpleasant effect on expenditure arrears (2019)
Working Paper: Fiscal consolidation by intergovernmental transfers cuts? The unpleasant effect on expenditure arrears (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:77:y:2019:i:c:p:266-275

DOI: 10.1016/j.econmod.2018.09.008

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