The effectiveness of institutional borrowing restrictions: Empirical evidence from Spanish municipalities

Abstract

The need for restrictions on borrowing by subnational governments is a generally accepted notion that is justified both by public choice theory and by the fact that such restrictions are in force in the majority of decentralized countries. Furthermore, recent breaches of the Stability and Growth Pact of the European Union have led to the introduction of legislative tools aimed at balancing the budget at all levels of government have come to the forefront of interest in European public finance research. This paper is concerned with the financial situation and debt level of Spanish municipalities from 1988 to 2000. We have two main objectives: the first is to assess the value of mandatory limitations on municipal borrowing and past trends in the borrowing policies adopted by Spanish local authorities. The second is to develop an econometric model using panel data stratified by population size to measure indebtedness in Spanish municipalities. These measures enable us to formulate a series of hypotheses to explain municipal borrowing practices, which are then tested empirically. The evidence thus obtained appears to support the effectiveness of institutional borrowing restrictions to introduce some financial discipline in the borrowing policies adopted by local governments in Spain. Copyright Springer Science+Business Media, LLC 2007Municipal indebtedness, Institutional restrictions, Net savings, Debt service,

On the Determinants of Local Government Debt: Does One Size Fit All?

“…For instance, some authors such as Bastida (2004, 2005) define it as a ratio of real investments and capital transfers to total expenditures. However, other authors (Vallés et al, 2003;Cabasés et al, 2007) calculate it as the ratio of real investment to GDP, and refer to this variable as intergenerational equity-since future generations will also benefit from the capital investments that current generations may make.…”

“…In this respect, Cabasés et al (2007) between the levels of debt and net savings; in other words, when an institution has positive net savings, the need to resort to borrowing might be, caeteris paribus, lower.…”

“…These and related studies have dealt with the general issue of monitoring local government debt. Related to this literature, other relevant contributions have considered more specific questions such as the need to guarantee a balanced budget in the long run (Poterba, 1997), to preserve the principle of intergenerational equity when issuing debt (Musgrave, 1989), or to minimize the use of debt as a political instrument to prevent a disproportionate rise of taxes in constituencies (Cabasés et al, 2007).…”

On the link between fiscal decentralization and public debt in OECD countries

“…Procedural rules, on the other hand, relate to the stringency of the procedures that govern the various stages at which the budget is formulated. Cabasés et al (2007), for example, explore the effectiveness of borrowing restrictions with data on Spanish municipalities, and find that they impose some discipline on the borrowing policies of local governments. Lagona and Padovano (2007) criticize the methodology with which the impact of budget rules is usually analyzed.…”

To What Extent Should Public Corporations Be Consolidated? Considering the Effects on Public Deficit and Debt in Spanish Municipalities

“…Prior researches in Spanish municipalities have studied the determinants of debt levels ( , the effectiveness of general fund balanced budgets and debt con-straints at limiting debt levels (Cabasés et al, 2007) and, more recently, the type of restrictions that are most often breached in this context (Benito et al, 2015).…”