Do fiscal rules of local debt affect municipal off-budget activities? Analysis of various types of municipalities

Abstract

Purpose: This paper aims to determine whether local governments (LGs) use non-consolidated municipally owned companies (MOCs), excluded from public sector entities and, consequently, from sub-national debt to avoid fiscal debt limits. This paper contributes to the literature by analysing the fiscal debt rule’s impact on the off-budget municipal activities in total and separate in different types of local government units. Design/methodology/approach: This paper uses difference-in-differences and the system general method of moments model with the Blundell–Bond estimator for dynamic panel data analysis of MOCs owned by 866 Polish municipalities in 2010–2018. Findings: This paper shows that the MOCs’ revenues support limited local public debt capacity by indebtedness restrictions imposed on municipalities in 2014. As a result, less indebted municipalities have higher off-budget revenues. The tightening of fiscal rules related to sub-sovereign indebtedness increased off-budget activities, but that effect is much stronger in rural and rural–urban municipalities than in urban municipalities and big cities. Originality/value: This paper contributes to the literature by exploring the fiscal debt rule’s impact on the off-budget municipal activities in total and separate in different types of local government units. In this paper, the authors combine theories relating to private and public finance; this is a novel approach and one that is also necessary – as, in fact, the worlds of public and private actors intersect – as exemplified by the existence of MOC.