Full Characterisation of the Political Economy of Fiscal Adjustment: Evidence from Spanish Municipalities

Antoni Castells (), Alejandro Esteller () and Maite Vilalta ()
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Antoni Castells: Institut d'Economia de Barcelona (IEB); Universitat de Barcelona (UB)
Alejandro Esteller: Institut d'Economia de Barcelona (IEB); Universitat de Barcelona (UB)
Maite Vilalta: Institut d'Economia de Barcelona (IEB); Universitat de Barcelona (UB)

No 2004/3, Working Papers from Institut d'Economia de Barcelona (IEB)

Abstract: By means of a dynamic panel data analysis, and using a database from municipalities of the province of Barcelona (1993-99), we describe their process of fiscal adjustment to a shock in tax capacity. About 25% of the shock is internalized through an increase in tax effort, 35% through a reduction in public expenditure (mainly investment), while the rest is covered by an increase in the level of debt (i.e., the adjustment is delayed). However, this process of adjustment is very much influenced by the political situation of the municipality. Coalition and minority governments ("weak" governments) tend to delay the (unavoidable) adjustment, and 70% of their shock is covered by an increase in the level of debt, while the rest of municipalities ("strong" governments) adjust immediately. Leftist governments mostly react through increases in tax effort, while rightist governments reduce public expenditure to a greater extent. Finally, we find that municipalities are relatively reluctant to decrease taxes, that is, they react differently to a negative (28%) and a positive (26%) shock with regard to the level of tax effort.

Keywords: Fiscal adjustment; Fiscal federalism; Political economy (search for similar items in EconPapers)
JEL-codes: D78 H61 H62 H71 H72 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2004
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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