Domestic Stability Pact Research Articles

Austerity Harmed Student Achievement

Abstract This paper shows that austerity spending cuts harmed student performance in standardised national tests. To identify this relationship, we use cross-municipality variation in the timing of eligibility for the Italian Domestic Stability Pact as an exogenous shifter of local public spending. We then compare test scores for students that were from the same municipality, but who were exposed to different levels of austerity cuts based on their birth year. Combining administrative data on public spending and test scores with an instrumental variable model, we show that the test score impact from austerity spending cuts is around 5.1% of a standard deviation in math and 4.6% in reading. These effects are more pronounced for children with limited resources at home. We provide suggestive evidence that school budget cuts account for most of the observed test score impact.

Fiscal rules and budget forecast errors of Italian municipalities

We study the impact of the domestic stability pact on the accuracy of budget forecasts of Italian municipalities. Identification of the causal effect exploits a quasi-natural experiment generated by the removal in 2001 of the fiscal restraints on budget decisions for municipalities with fewer than 5000 inhabitants and by stricter budgetary restrictions and severe penalties for noncompliers in 2002. We find that relaxing fiscal rules had a sizeable impact on budget forecast errors, especially in 2002. In fact, revenue (expenditure) forecast errors for municipalities with fewer than 5000 inhabitants became 26% (22%) larger than in the past.

The unintended composition effect of the subnational government fiscal rules: The case of Italian municipalities

Although numerical fiscal rules may be introduced to achieve several objectives, to date the maintenance of fiscal sustainability is their predominant goal. This is particularly true at subnational level; maintaining fiscal discipline in a decentralized setting is challenging and subnational government fiscal rules are considered one of the most valid solutions to the problem. While theoretical and empirical literature has mainly focused on their effectiveness in containing subnational deficit and/or debt, little attention has been paid to the possible trade–offs and side effects of the rules on the composition of subnational expenditure. The aim of this paper is to fill this gap by exploiting the case of Italian municipalities, which have been subject for fifteen years (1999–2015) to a set of rules called Domestic Stability Pact. The Italian DSP framework – imposing rules only on municipalities above a population threshold (5000 inhabitants) – allows us to implement a quasi–experimental technique to investigate the unintended composition effects of the rules. A difference–in–discontinuities design permits to find rigorous empirical evidence that the switching in 2007 to rules which are more binding in terms of fiscal discipline leads to a recomposition of municipal expenditure against investment spending. The analysis is then integrated by evaluating the impact of the rules on six categories of investment expenditure. Investment in human capital and infrastructure seems to be the most affected.

Corruption under Austerity

In this paper, we study how policies limiting the spending capacity of local governments may lead to a reduction in corruption. We exploit the extension of one such policy, the Domestic Stability Pact (DSP), to Italian municipalities with less than 5,000 inhabitants that occurred in 2013. Using a ‘local Difference-in-Differences’ approach, we show that the extension of the DSP led to a substantial decrease in recorded corruption rates. This effect emerges only in areas in which the DSP put a binding cap on municipal capital expenditures, in line with the hypothesis that investments and procurement are naturally prone to corruptive phenomena. We also show that i) the reduction in corruption is linked to accountability incentives; ii) and it is not just a mechanical consequence of the decrease in investments, by pointing out evidence of an improvement in the corruption-proofness of public spending. We then estimate the impact of the extension of the DSP on local welfare, finding a null effect. Overall, our findings suggest that budget constrains might induce local governments to curb expenditures in a way that dampens their exposure to corruption without depressing local welfare.

Corruption under Austerity

We study how policies limiting the spending capacity of local governments may reduce corruption. We exploit the extension of one such policy, the Domestic Stability Pact (DSP), to small Italian municipalities. The DSP led to a decrease in both recorded corruption rates and corruption charges per euro spent. This effect emerges only in areas in which the DSP put a binding cap on municipal capital expenditures. The reduction in corruption is linked to accountability incentives as it emerges mostly in pre-electoral years and for reeligible mayors. We then estimate the impact of the extension of the DSP on local public goods provision in the following years, finding a null effect in the short run. Overall, our findings suggest that budget constraints might induce local governments to curb expenditures in a way that dampens their exposure to corruption without depressing local public goods provision.

Fiscal rules to tame the political budget cycle: Evidence from Italian municipalities

The paper provides evidence that fiscal rules can limit the political budget cycle. It uses data on Italian municipalities during the 2000s and shows that: 1) municipalities are subject to political budget cycles in capital spending; 2) the Italian sub-national fiscal rule (Domestic Stability Pact, DSP) introduced in 1999 has been enforced by the central government; 3) municipalities subject to the fiscal rule show more limited political budget cycles than municipalities not subject to the rule. In order to identify the effect, we rely on the fact that the domestic fiscal rule does not apply to municipalities below 5000 inhabitants. We find that the political budget cycle increases real capital spending by about 10–20 percent on average in the years prior to municipal elections and that municipalities subject to the DSP show a pre-electoral increase in capital spending which is only a quarter of the one of municipalities not subject to the rule.

Municipality Budget Rules and Debt: Is the Italian Regulation Effective?

This article studies the local fiscal rules in force in Italy—the Domestic Stability Pact and debt constraints—that have been adopted to coordinate levels of government and be compliant with the European Stability and Growth Pact. The aim is to assess the effects of such rules on local borrowing and investments, the latter being crucial for growth. To this end, a dataset of Italian municipality budgets from 1999 to 2009 is exploited. The analysis shows that fiscal rules help to control local debt, but they have also led to a sharp decrease in investments, especially among compliant municipalities

Il calo degli investimenti nei Comuni tra Patto di stabilità interno e carenza di risorse

This paper analyzes the decline in Italian municipal investments that began in the middle of the last decade. The analysis shows that, organizational methods for service provision and budgetary financial conditions being equal, investments declined more sharply in the larger municipalities subject to the Domestic Stability Pact than in those which were exempted. The Pact effects have been relatively stronger for those municipalities in better financial conditions, that would have been able to finance investments with their own resources. The Pact has helped to achieve the main goal of the legislator, i.e. to keep the deficit under control. It has also provided a stimulus for local governments to be more rigorous in drafting their budgets, leading to a closer correlation between the amounts committed and those actually spent, in line with the provisions of the new accounting system which has come into force in 2015.

Il Calo Degli Investimenti Nei Comuni Tra Patto Di Stabilitt Interno E Carenza Di Risorse (The Decline in Municipal Investments between Domestic Stability Pact and Lack of Financial Resources)

Italian Abstract: Il lavoro analizza il calo degli investimenti nei Comuni italiani in atto dalla meta dello scorso decennio. L’analisi mostra che, a parita di modalita organizzative nella gestione dei servizi offerti e di situazione finanziaria di bilancio, i Comuni di maggiore dimensione “soggetti al Patto di stabilita” interno hanno mostrato un calo piu intenso degli investimenti rispetto a quelli esenti. Gli effetti del Patto sono stati relativamente piu intensi per i Comuni caratterizzati da una migliore situazione finanziaria di bilancio e dotati quindi delle necessarie risorse per finanziare gli investimenti. Negli anni piu recenti, l’allentamento dei vincoli e l’introduzione dei Patti territoriali hanno attenuato le difficolta di smaltimento dei residui passivi. Il Patto ha favorito il conseguimento del principale obiettivo del legislatore, ossia il controllo dell’indebitamento netto, e ha inoltre rappresentato uno stimolo per le amministrazioni locali ad adottare comportamenti piu rigorosi nella costruzione dei bilanci, inducendo una piu intensa correlazione tra le somme impegnate e quelle effettivamente spese, in linea con quanto previsto dal nuovo sistema contabile che entrera in vigore dal 2015. English Abstract: This paper analyzes the decline in Italian municipal investments that began in the middle of the last decade. The analysis shows that, organizational methods for service provision budgetary financial conditions being equal, investments declined more sharply in the larger municipalities “subject to the Domestic Stability Pact” than in those which were exempted. The Pact effects have been relatively stronger for those municipalities in better financial conditions, that would have been able to finance investments with their own resources. In more recent years, the relaxation of the constraints and the introduction of regional pacts have alleviated difficulties in settling expenditure arrears. The Pact has helped to achieve the main goal of the legislator, i.e. to keep the deficit under control. It has also provided a stimulus for local governments to be more rigorous in drafting their budgets, leading to a closer correlation between the amounts committed and those actually spent, in line with the provisions of the new accounting system which will come into force in 2015.

Fiscal Rules and Public Spending: Evidence from Italian Municipalities

The aim of this paper is to investigate the extent to which local budget spending composition reacts to fiscal rules variations. I consider the budget of Italian municipalities and exploit specific changes in the Domestic Stability Pact’s rules, to perform a difference-in-discontinuities analysis. The results show that not all rules are equally effective: imposing a cap on the total amount of consumption and investment is not as binding as two caps, one specific for consumption and a different one for investment spending. More specifically, the consumption variation is triggered by changes in the level of wages and services spending, while investment relies on infrastructure movements. In addition, there is evidence that when an increase in investment is achieved, there is also a higher budget deficit level.

Fiscal Federalism and the Stability and Growth Pact: A Difficult Union

Balassone and Franco note that while the budget rules that frame EMU apply to national States, several EMU member nations are already organised on a federal basis and others, pressed by political and economic needs, have started to enact reforms aimed at increasing the degree of decentralisation. They highlight several critical areas in the interaction of fiscal decentralisation and the Stability and Growth Pact. Balassone and Franco point to the reduced flexibility of the European approach compared with solutions adopted in federally structured countries and to the asymmetry between the responsibilities laid on national and local governments by European rules (compliance with the rules depends on the conduct of all levels of government, but de facto it is the central government that is answerable to the EU and that must pay the price for non-compliance). This calls for strict controls over local governments to prevent free-riding. The authors examine alternative solutions to deal with these problems, such as the mechanical extension of the Stability and Growth Pact, the introduction of a golden rule for decentralised governments, also in the form of a market for deficit permits, and the use of reserve funds. Finally, Balassone and Franco analyse how the issue has been addressed in Italy through the introduction of the Domestic Stability Pact and stress the need for further significant refinements of these domestic rules.

Political yardstick competition among Italian municipalities on spending decisions

We investigate the presence of political yardstick competition on current spending decisions in a sample of Italian municipalities. We find significant evidence of yardstick competition when we explicitly account for the domestic stability pact (DSP), a fiscal rule introduced to limit the budget deficit of local administrations. First, we estimate a static specification of a spatial panel model, and then we check for the robustness of our results with a dynamic specification. The static analysis shows that municipalities engage in yardstick competition during pre-election years, regardless of whether they are subject to the DSP or not. The dynamic analysis shows that the yardstick hypothesis remains robust only for municipalities not constrained by the DSP.

Il Patto di Stabilitŕ Interno per i Comuni: una valutazione con i certificati dei conti consuntivi

While the Central Government is responsible for the European Stability and Growth Pact, internal coordination among different layers of government is crucial to comply with the European obligation. In this paper the Italian Domestic Stability Pact (DSP) on local authorities is evaluated in terms of its effects on the public sector borrowing requirement from 1999 to 2005. A new data base is used to verify yearly and for each local authority the respect of the Italian DSP. More precisely, the fiscal rule is calculated on official budget data for the whole sample of local authorities tied. The results supply evidence for reconsidering the structure of the DSP in terms of binding fiscal rule, adjustment of structural local budget deficits and international compliance.

Fiscal Federalism and the Stability and Growth Pact: a Difficult Union

The budget rules that frame the European Monetary Union apply to the national States. Several EMU member nations are already organised on a federal basis; others, pressed by political and economic needs, have started to enact reforms aimed at increasing the degree of decentralisation. This paper examines the financial relations among different levels of government relative to the need to respect the budgetary rules established by the European Union. The analysis points out several critical areas in the interaction of fiscal decentralisation and the Stability and Growth Pact: a trade-off between the allocative benefits of decentralisation and exploiting the margins for counter-cyclical policy offered by compliance with the Pact is identified. The issue has been addressed in Italy through the introduction of the Domestic Stability Pact; this analysis stresses the need for further significant refinements.