Fiscal Rules to Tame the Political Budget Cycle: Evidence from Italian Municipalities

January 20, 2017

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Lorenzo Forni, and Andrea Bonfatti. Fiscal Rules to Tame the Political Budget Cycle: Evidence from Italian Municipalities, (USA: International Monetary Fund, 2017) accessed September 20, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

The paper provides evidence that fiscal rules can limit the political budget cycle. It focuses on the application of the Italian fiscal rule at the sub-national level over the period 2004-2006 and shows that: 1) municipalities are subject to political budget cycles in capital spending; 2) the Italian subnational fiscal rule 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 5,000 inhabitants. We find that the political budget cycle increases real capital spending by about 35 percent on average in the years prior to municipal elections and that the sub-national fiscal rule reduces these figures by about two thirds.

Subject: Aging, Budget planning and preparation, Capital spending, Current spending, Expenditure, Fiscal policy, Fiscal rules, Population and demographics, Public financial management (PFM)

Keywords: Analysis, Baseline result, Budget cycle, Budget planning and preparation, Capital, Capital spending, Capital spending, Current spending, DSP rule, DSP threshold, Fiscal rules, Local government finance, Municipality, Regression discontinuity, Regression discontinuity analysis, WP

Publication Details

Pages:

20
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/006
Stock No:

WPIEA2017006
ISBN:

9781475569971
ISSN:

1018-5941

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