Revenue vs Expenditure Based Fiscal Consolidation: The Pass-Trough from Federal Cuts to Local Taxes
Tommaso Nannicini () and
Francesco Porcelli ()
No 644, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University
A growing literature emphasizes that the output effect of fiscal consolidation hinges on its composition, as the choice of increasing revenues vs cutting expenditure is not neutral. Existing studies, however, underscore the role of local governments in a federal setting. Indeed, transfer cuts at the central level might translate into higher local taxes, changing the effective composition of the fiscal adjustment. We evaluate this transmission mechanism in Italy, where municipalities below the threshold of 5,000 inhabitants were exempted from (large) transfer cuts in 2012. This allows us to implement a difference-in-discontinuities design in order to estimate the causal impact of transfer cuts on the composition of fiscal adjustment, also because tight fiscal rules impose a balanced budget on Italian municipalities. We disclose a pass-through mechanism by which local governments react to the contraction of intergovernmental grants by mainly increasing taxes rather than reducing spending. From a political economy perspective, this revenue based fiscal consolidation is driven by municipalities with low electoral competition and low party fragmentation. Keywords: fiscal consolidation, intergovernmental grants, difference-in-discontinuities. JEL classification codes: H2, H77, H87, D7.
New Economics Papers: this item is included in nep-pbe and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:igi:igierp:644
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University via Rontgen, 1 - 20136 Milano (Italy).
Bibliographic data for series maintained by ().