Non-fulfilment of debt limits in spanish municipalities

Abstract

In decentralised European Monetary Union members such as Austria, Belgium, Finland, Germany and Spain, the Stability and Growth Pact can only be implemented if there is close fiscal coordination among government tiers. Thus, limits on subcentral governments' debt are essential in this coordination. This paper analyses which political and socio-economic factors influence compliance with debt limits. We use a database with information on Spanish municipalities with at least 1,000 inhabitants for 2001-08. Our results indicate that the non-financial surplus limit is the requirement that is most commonly breached, followed by the net operating balance requisite. Population has a positive and significant impact on failure to comply with debt limits. In addition, we show a positive relationship between income level and global limit compliance. Finally, it can be stated that municipalities appear to manipulate debt with electoral purposes.