The Impact of Local Governments' Budget Transparency on Debt in Croatia

Abstract

We investigate the impact of the budget transparency of local governments on debt using a panel data analysis of all 556 Croatian cities and municipalities over the 2014-2021 period. The analysis shows that increased budget transparency is associated with lower local government debt, i.e., budget transparency enables better public control of unnecessary debt. Additionally, regarding the legal regulation according to which higher own revenues enable higher borrowing, we examine the link between budget transparency and own revenues. The results show that local governments with higher budget transparency have higher own revenues, i.e., budget transparency can help local governments better control opportunistic borrowing and simultaneously increase their own revenues. Finally, we detect political budget cycles related to local government revenues and debt. This paper constitutes the first attempt to explore the effect of budget transparency on debt and own revenues in all local governments in one young democracy.