Public sector efficiency, Political and budgetary institutions, Fiscal capacity, Democratic participation, H72, H75,

No abstract

Fiscal discipline is a concern because of possible spending and deficit bias in fiscal and political institutions. This study investigates adjustments under fiscal federalism, concentrating on decentralized government in Denmark and allowing for a comparison with neighbors Norway and Sweden and with similar analyses of U.S. states. Fiscal adjustments are investigated as responses to shocks measured as deviations from budgeted current surplus. The econometric results show that local governments respond by compensating adjustment of tax rates and expenditures. The shock responses tend to be asymmetric. Positive shocks hardly affect the income tax rate, whereas negative shocks induce higher tax rates. The authors interpret the asymmetry as the result of spending pressure due to redistributive politics and show that political characteristics are important for tax determination. They conclude that the Danish design of controlling the local public sector avoids fiscal imbalances but allows a bias toward expansion.

Local governments, Budgetary institutions, Public deficits, Panel data, C23, D70, H7,

The paper analyzes the intertemporal spending behavior of Norwegian local governments with particular attention to liquidity constraints imposed by balanced-budget-rules (BBRs).The main findings are: (i) On average, local government spending behavior is neither perfectly forward looking nor fully myopic. (ii) Local governments with good fiscal conditions behave more forward looking than other local governments. (iii) A high degree of party fragmentations is associated with less forward looking behavior. The overall assessment is that the departure from rational forward looking behavior reflects both liquidity constraints imposed by BBRs and myopic behavior.