The expenditure composition and trade-offs in local government budgets

Abstract

The fiscal behavior of local governments has gained additional attention from academia and policymakers due to decentralization reforms transferring power from central to lower levels of government. As local governments assume more responsibilities for public goods and services, understanding their expenditure composition and trade-offs becomes crucial. While existing literature has examined the factors influencing the size of local government budgets, less attention has been given to the decision-making mechanisms and trade-offs within budget allocations. This study investigates the expenditure composition of 300 Flemish municipalities, using an unsupervised clustering algorithm and a binary logistic regression framework. Our results are indicative of how local governments tend to prioritize specific policy areas in the design of their budgets, when they operate under strict institutional and fiscal constraints such as a balanced budget rule.