The Determinants of the Municipal Debt Policy in Spain

By Benito, Bernardino; Bastida, Francisco | Journal of Public Budgeting, Accounting & Financial Management, Winter 2004 | Go to article overview

The Determinants of the Municipal Debt Policy in Spain


Benito, Bernardino, Bastida, Francisco, Journal of Public Budgeting, Accounting & Financial Management


ABSTRACT. This paper analyzes the impact of economic, social and political factors on municipal debt behavior. With this aim, we have obtained a stratified random sample of 130 cities during a five-year period. These data have been used to configure a micro panel to obtain accurate estimates and to control for problems such as unobserved heterogeneity. The main conclusion obtained from this process is that non-financial surplus/deficit, financial independence, capital expenditures, and capital revenues are the variables that best explain the indebtedness of this type of entities.

INTRODUCTION

There are three government levels in Spain: central government (Parliament and the Cabinet), regional government (17 autonomous communities), and local government (50 provinces and 8,102 municipalities). Municipalities are grouped by provinces, and the latter are grouped by autonomous communities. Each level is multi-functional, within its jurisdiction, on different issues and activities.

Each municipality has a mayor, a cabinet, and a professional administration. The mayor is the head of the executive, and is elected indirectly by the citizens. The citizens elect the members of the cabinet, and these in turn, elect the mayor. Municipalities are allowed to both raise local taxes and charge tariffs for the services they provide.1

Municipalities have always played a crucial role with regard to two aspects of the Spanish public sector: first, in relation to political representation and second, because they must provide key services such as day-care nurseries, public transport, waste disposal, sewage, construction and management of sports centers and public green areas.2

LIMITS ON LOCAL GOVERNMENT INDEBTEDNESS IN SPAIN

During the last few years, interest has grown to limit the indebtedness of the Public Administration in Spain and in the rest of the European Union. The efforts have been aimed particularly at sub-central governments. The different reasons that justify the establishment of these limits can be summed up as follows (Monasterio, 1996):

a) To promote inter-generational equity, in order to avoid having today's population issue debt to enjoy services whose financial cost will be transferred to future taxpayers;

b) To sustain financial balance, i.e., revenues must cover expenses; and

c) To meet the economic stabilization objectives imposed by the Central Government.

Different types of instruments can be used to establish these limitations. They range from trusting market mechanisms to establishing some internal control at the center of the public sector (Ter-Minassian & Craig, 1997). In this latter option, the control instruments can be the establishment of rules limiting indebtedness, the introduction of coordination mechanisms, or finally, the use of direct control means by the Central Government.

In the case of the Spanish Local Governments, the Central Government opted for the establishment of a series of limitations. These limitations vary according to the type of indebtedness: short or long term (see Table 1).

Aside from these limitations, Parliament passed in December 2001 the Law of Budgetary Stability to implement the Pact of Stability and Growth, which was agreed upon in the pact of Amsterdam of June 1997. This Pact limits the use of the public deficit as an instrument of economic policy in the European Economic and Monetary Union. In accordance with that Law (effective January 1, 2003), the Public Administrations will not be able to have a non-financial deficit (see Table 3). This means that the non-financial revenues will have to cover, at least, the non-financial expenditures. Therefore, in practice, this implies the impossibility of getting into debt, unless very special situations occur.

Table 2 analyzes the extent to which municipalities are complying with these debt limits. We have subdivided the municipalities into two subsets (population less than or exceeding 20,000 inhabitants) in order to test if there are differences due to size. …

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