Analysis of the effectiveness of regulation on financial health of Spanish local governments

ABSTRACT

The need to reduce public sector costs and debt has resulted in the implementation of requirements in many countries. Spain belongs to a group of countries which monitor the financial health of their local governments, using financial indicators enforced by law, and reporting this information periodically. The objective of this paper is to analyse whether the introduction of the 2012 Spanish legislation regarding fiscal stability and budgetary balance and Ministry of Finance Order 1781/2013, which develop new indicators, have led to improvements in the financial health of local governments. The results of our analysis show that the introduction of legal requirements is effective and that the disclosure of indicators for benchmarking purposes has been beneficial and positive, although this is not so in all cases. The practical implication of this study is that the dual demands of evaluating the financial situations of local governments and disclosing this information reinforce their responsibility with respect to the general interest. This enables the comparative evolution of indicators, concluding that requirements are also needed to ensure that the goals are achieved, thereby helping to restore the reliability and transparency of their activities.

KEYWORDS:

• Benchmarking
• financial risk
• isomorphism
• local governments
• improvement
• financial health

JEL Codes::

• H7: State and Local Government- Intergovernmental Relations
• H70 General
• H72 State and Local Budget and Expenditures
• H74 State and Local Borrowing

Disclosure statement

No potential conflict of interest was reported by the author(s).

Laws cited

The Organic Law on Budgetary Stability and Financial Sustainability of Public Administrations (LO 2/2012) of 27 April 2012.

Reporting obligations of information (HAP/2105/2012 Order), adopted on 1 October 2012, which develops the commitments contained in the Organic Law on Budgetary Stability and Financial Sustainability of Public Administrations.

Instructions of accounting model, differentiating the model according to population and budget of the local entity.

Instruction of the normal local accounting model (HAP/1781/2013 Order) of 20 September 2013.

Instruction of the simplified and basic local accounting model (HAP/1782/2013 Order) of 20 September 2013.

Royal Decree 424/2017 of 28 April, which regulates the legal regime of internal control in the entities of the Local Public Sector.

Royal Decree-Law 8/2010 of 20 May, which adopts extraordinary measures to reduce the public deficit.

Law 7/1985 of 2 April, regarding the Basis of Local Government.

Additional information

Funding

This study has been carried out with the financial support of the Spanish Ministry of Science and Innovation (project PID2020-113905GB-I00) and the Regional Government of Aragón (project S56_20R).