Biased Budgeting in the Public Sector: Evidence from Italian Local Governments

Abstract

The purpose of this paper is to analyse, in terms of presence, determinants and purposes, the misrepresentation of expected revenues during budget formulation and the misrepresentation of actual revenues during budget execution. To this end, we use six-year panel data from Italian municipalities with populations above 15,000. Our results suggest that overestimations of current revenues are more frequent than underestimations, during both budget formulation and budget execution. In terms of determinants, our results highlight the impact on revenue misrepresentation of both political orientation and fiscal stress. Finally, in terms of purposes, we show that revenue underestimation during budget formulation and revenue overestimation during budget execution may contribute to the formation of surpluses. The former, in particular, may allow mayors to create a ‘war chest’ in non-election years, which can then be used to increase net borrowing on the eve of elections.

Key Words:

• Budget formulation
• budget execution
• municipalities
• revenue misrepresentation
• dynamic model
• panel data

Notes

1. Aida PA is a database provided by Bureau van Dijk and containing financial data for local governments in Italy. For every year, the data set provides information on each municipality’s initial budget and year-end statement.

2. The National Audit Office even employs a specific indicator called ‘style of administration’, described as measuring ‘the seriousness of establishments of amounts receivable’ and defined as the percentage of establishments of amounts receivable that are collected by the end of the following year (see, for instance, resolution 325/2008 adopted by the Abruzzo Regional Section of the National Audit Office).

Additional information

Notes on contributors

Eugenio Anessi-Pessina

Eugenio Anessi Pessina is Professor of Public and Health-Care Management at Università Cattolica in Milan, Italy. In addition, he is a senior fellow at the Wharton School of the University of Pennsylvania (Department of Health Care Systems) and the editor of Azienda Pubblica (a leading Italian-language public management journal). His research interests include public sector budgeting and accounting, health care management, and management control in government and health care organisations.

Mariafrancesca Sicilia

Mariafrancesca Sicilia is an assistant professor at Bergamo University in Italy. Her research covers public sector budgeting, accounting, accountability, performance measurement and models of public services delivery. She has carried out research for Italian central government departments, local governments and other public bodies and is managing editor of Azienda Pubblica.