The other side of the local government ledger—The association between revenue growth and population growth

Abstract

Population growth exerts an impact on both sides of the local government accounting ledger—expenditure and revenue. Despite this fact, the vast scholarly literature on local government finance has been myopically focussed on expenditure functions. This apparent neglect to also consider the revenue side of the ledger is problematic because many regulators across the globe have exhorted local governments to pursue growth according to the assumption that it will promote fiscal health. In this article, we first set out a number of propositions that combine to cast some doubt on the common wisdom dispensed by local government policy-makers. Following this, we empirically explore the effects of population growth on revenue by making recourse to a comprehensive 10-year panel of revenue and population data. We conclude our work with some important public policy recommendations arising from the need to mitigate the prima facie surprising results that we obtain. Points for practitioners: Public policy architects have exhorted local governments to pursue population growth as a way to mitigate financial sustainability problems. However, this advice has been based on assumptions only and not subjected to empirical investigation. Econometric estimations demonstrate a negative association between unit revenue and population growth which means that the policy advice is likely to exacerbate financial distress. A number of changes could be made to local government taxation, pricing, and grants that would mitigate the deleterious effects of population growth on financial sustainability.