Spending Pressure, Revenue Capacity and Financial Conditon In Municipal Organizations: An Empirical Study

Abstract

Much of the past studies on the determinants of financial condition argue that local government financial condition is a function of revenue capacity and spending pressure represented by various socio-economic factors and have exhibited inconclusive results. In response, this study argues that the effects of socio-economic and demographic factors on financial conditions depend on the context in which the local government operates. The inconclusive results found in the literature suggest the need for investigating the effects of these factors in various contexts in order to understand how they operate. This research examines the relationships of spending pressure and revenue capacity with financial conditions of municipal organisations from a developing country's context. Spending pressure indicates the demands for municipal services and is represented by population size, population density and disaster susceptibility. Revenue capacity demonstrates the ability of municipal organizations in obtaining resources for public purposes. Based on theoretical and empirical studies from the literature, this study develops hypotheses and tests them using data from a random sample of 93 municipal organisations from Bangladesh. Analysing data by applying a linear regression model, the paper finds empirical supports for positive relationships of disaster susceptibility and revenue capacity but negative relationship of population size with municipal financial conditions. Such a relationship of population density is found to be positive but insignificant, which contradicts with the results found in the literature. Theoretically, this study enhances the existing literature as it facilitates a better understanding on how the socio-economic and demographic variables interact with municipal financial conditions from a developing country context. The empirical findings can be of great significance for both managers and politicians. While municipal managers can find the information of this study useful in improving their organizational financial conditions by exploiting their relationships with socio-economic and demographic factors to generate appropriate level of revenues and control expenditures, policy makers can derive insights from this study to devise effective financial transfer policies for maintaining sustainability of local government services.