Revenue Decentralization, Central Oversight and the Political Budget Cycle: Evidence from Israel

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. Revenue decentralization, central oversight and the political budget cycle: Evidence from Israel AbstractThis paper examines whether revenue decentralization and direct external financial supervision affect the incidence and strength of political budget cycles, using a panel of Israeli municipalities during the period 1999-2009. We find that high dependence on central government transfers-as reflected in a low share of locally raised revenues in the municipality's budget-exacerbates political budget cycles, while tight monitoring-exercised through central government appointment of external accountants to debt accumulating municipalities-eliminates them. These results suggest that political budget cycles can result from fiscal institutions that create soft budget constraints: that is, where incumbents and rational voters can expect that the costs of pre-election expansions will be partly covered later by the central government.

Political Transfer Cycles from the Centre to the states

“…Alesina and Paradisi (2014) find a strong PBC particularly for the south of Italy with the use of a 'lower tax' regime close to the election. Baskaran, Brender, Blesse, and Reingewertz (2016) find that a low share of revenue raised by the Israeli local municipalities' budget creates excessive dependence on central government transfers, and hence on the PBC. However, a tightening of the monitoring procedures eliminates it.…”

“…Some of the important empirical works are Kroth (2012); Reid (1998); Kneebone and McKenzie (2001); Drazen and Eslava (2010); Brender and Drazen (2013); Baskaran, Brender, Blesse, and Reingewertz (2016); Brollo and Nannicini (2012); Baskaran and Hessami (2014); and Chortareas, Logothetis, and Papandreou (2016). Kroth (2012) uses a panel data set of nine provinces of South Africa over the period 1995-2010 and derives two important results.…”

Local Own Revenue, Decentralization and Local Financial Independent

“…This system arises due to demands from the community due to uneven development in various regions. Therefore, the system is an opportunity for the region to be able to manage its development independently, including to optimize its revenue sources (Haryanto, 2017a;Baskaran, Brender, Blesse, & Reingewertz, 2016;Prakoso, Islami, & Sugiharti, 2019).…”

Polity age and political budget cycles: Evidence from a Danish municipal reform

“…Both measures only include current operating expenditures in current prices and exclude local investment expenditure. While studies of local political budget cycles often find cycles in public capital investment, since these are arguably visible to voters (Klein and Sakurai, 2015;Baskaran et al, 2016), Danish municipalities do not use accrual accounting for investment expenditures.…”