To what extent should public corporations be consolidated? Considering the effects on public deficit and debt in Spanish municipalities

Abstract

The consolidation perimeter of the public sector is the most important line between the micro and macro systems of government accounting. This paper focuses on the public sector boundary and assesses the potential impact on key reported figures - such as the ‘Maastricht’ deficit and debt ratios - that would result from moving public corporations inside the perimeter of the consolidated general government sector, public corporations that currently lie outside the general government sector. After examining 90 Spanish local governments with populations of over 50,000 during the 2010-2012 period, our results show that including public corporations within the general government sector perimeter leads to substantial differences in deficit and debt ratios, and that these differences significantly increase the number of municipalities in violation of fiscal limits imposed by the government. We also find that municipalities’ pre- and post-consolidation debt ratios are significantly different depending on the ruling party’s political ideology.