Fiscal consolidation by intergovernmental transfers cuts? The unpleasant effect on expenditure arrears

Paolo Chiades (1) , Luciano Greco (2) , Vanni Mengotto (1) , Luigi Moretti (3) , Paola Valbonesi (2)

1 Bank of Italy
2 Unipd - Università degli Studi di Padova = University of Padua
3 CES - Centre d'économie de la Sorbonne

For the period 2003–2014, we investigate unexplored effects of fiscal consolidation in decentralized public finance on a large dataset of Italian municipalities. Based on a simple, realistic theoretical model, we show that municipalities increase arrears on committed investment expenditure as a response to intergovernmental transfer cuts. Then, we test our predictions controlling for potential sources of endogeneity, and find that a reduction in intergovernmental transfers causes a significant increase in arrears, in addition to other common adjustments to local fiscal policies (e.g., tax revenues). Our results highlight a perverse effect of fiscal consolidation packages implemented by centrally imposed fiscal restraints.

Mots clés: Fiscal rules; Instrumental variables; Expenditure commitments; Fiscal federalism

Domaines: Economies et finances; Science politique

Paolo Chiades, Luciano Greco, Vanni Mengotto, Luigi Moretti, Paola Valbonesi. Fiscal consolidation by intergovernmental transfers cuts? The unpleasant effect on expenditure arrears. Economic Modelling, 2019, 77 (March 2019), pp.266-275. ⟨10.1016/j.econmod.2018.09.008⟩. ⟨hal-01881787⟩