Threshold effects of regional fiscal stress index on employment

Abstract

Economic shocks and structural budget imbalances, when combined with ongoing uncertainty, can lead to fiscal stress in governments. This fiscal stress, along with the resulting volatility in the financing of local governments, can worsen their ability to meet short-term and long-term financial commitments and increase their reliance on the central government. Consequently, the effects of this stress, whether positive or negative, are closely tied to the actions and responses of both central and local governments. This highlights the crucial need for policymakers in central and local governments to respond accurately and promptly, through constant monitoring and assessment of fiscal stress indices. This study aims to illustrate the fiscal situation in the 31 provinces of Iran by calculating the local fiscal stress index based on fiscal and budgetary variables specific to each province. Furthermore, it seeks to estimate the threshold and spatial effects of this index on employment during the period of 2005–2017 using the panel smooth transition regression method. The findings reveal that initially, financial stress has an immediate and positive impact on employment. However, once the threshold of financial stress is crossed, and the subsequent pressures accumulate, the ability to control this imbalance diminishes, resulting in a decline in employment. Additionally, the ability or inability of local governments to manage income and expenses not only affects the economic indicators of the region but also spills over to neighbouring regions, leading to capital outflow and workforce migration, which are two major contributing factors to economic growth.