The impact of revenue autonomy on the composition of local public spending: evidence from Poland

ABSTRACT

This paper studies the relationship between tax autonomy and the structure of local public expenditures. We rely on panel data from Poland for more than 2400 municipalities over the years 2002–2014. We use a measure of tax autonomy, based on ‘potential’ own revenues, defined as revenues that the authorities are entitled to collect, before local tax policies have been implemented. This measure alleviates to some extent the endogeneity of indicators based on actually collected own taxes. Our results suggest a U-shaped relationship between the ratio of own local taxes and the share of capital expenditures and a negative relationship between the former ratio and the share of education spending.

KEYWORDS:

• Decentralisation
• tax autonomy
• local public spending
• local investment

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. It needs to be stressed that productive public expenditures are not limited to investment and education spending; however, according to a meta-analysis of Nijkamp and Poot (2004) and Reed and Sidek (2016), these items are more likely to support long-run growth than other spending items.

2. The only other studies done for Poland that we know of are: Bukowska and Siwińska-Gorzelak (2019) and Köppl Turyna et al. (2016). Polish local tax policy has been also analysed by Swianiewicz and Łukomska (2016) however they do not analyse the link between tax autonomy and other fiscal variables.

3. We thank the Anonymous Referee for insightful comments on this issue.

4. For example, Turrini (2004) or Martner and Tromben (2005) provide evidence that during fiscal adjustments, the cuts in investment spending are higher, compared to other spending items.

5. The description of the evolution of the decentralisation process in Poland and its present state can be found in Levitas (2017).

6. The system of local revenues has not been subject to major changes during the period of analysis, although in 2004 and 2009 changes were implemented with respect to PIT, what has affected the share of this tax in overall local revenues.

7. As we have stated above, municipalities are required to report the value of revenues that were lost due to local tax reductions and exceptions. This data is available at the Polish Ministry of Finance.

8. To check the robustness of the results, we have also estimated regressions, where the variable Mayor_competition was substituted with a dummy variable equal to one if the vote margin was higher than 70% and zero otherwise. Table A5, column 1 in the Appendix shows the results have remained similar to our basic outcomes.

9. As already indicated, the local political scene has a non-partisan character and is dominated by local committees, as opposed to national political parties.

10. During the communist regime, the agricultural sector was partly nationalised. While private ownership of land dominated, the state-owned agricultural enterprises encompassed over 18% of agricultural land (Pyrgies 1995). These state-farms dominated certain regions in Poland before the year 1989 and have had profound consequences for human capital and development perspectives of these regions during the transition to a market economy. This mark is still visible today.

11. Although the financing of primary and lower-secondary education belongs to the municipalities, the local freedom to shape these expenditures, especially with regard to teachers’ wages is limited. Teachers’ wages and workload are regulated by the law that among others, defines the minimum salary that should be paid to teachers. While municipalities are obliged to finance teachers’ wages, they have some flexibility in shaping education spending. Local governments are free to raise wages above the minimum rate, they can also shape the school network, what has an impact on the number of teachers employed.

Additional information

Funding

This work was supported by the Narodowe Centrum Nauki [2014/13/B/HS4/03204].

Notes on contributors

Joanna Siwińska-Gorzelak

Joanna Siwińska-Gorzelak is an assistant professor at University of Warsaw, Faculty of Economic Sciences. Graduated also from University of Sussex. Her scientific interests concern fiscal policy and local finance & development. Contractor and principal investigator of research projects financed by the World Bank and Polish National Science Center.

Grażyna Bukowska

Grażyna Bukowska is an assistant professor at University of Warsaw, Faculty of Economic Sciences. Her scientific interests focus on political economy and local fiscal policy and local development.

Piotr Wójcik

Piotr Wójcik is an assistant professor at University of Warsaw, Faculty of Economic Sciences. Graduated also from Katholieke Universiteit Leuven. His scientific interests concern regional inequalities and convergence as well as quantitative finance. Contractor and principal investigator of research projects financed by the European Commission and Polish National Science Center. Expert in the use of R software for efficient data processing and machine learning. Open source software enthusiast.