The effects of fiscal decentralisation on the strength of political budget cycles in local expenditure

ABSTRACT

In this article we analyse the effects of political business cycles and fiscal decentralisation on the expenditure categories of Polish municipalities. We find convincing evidence demonstrating the impact of strong political business cycles in almost all expenditure categories, particularly for the categories of expenditure relevant to electoral success, such as infrastructure and social programmes. We find evidence that transfers to municipalities increase the strength of the electoral cycle.

KEYWORDS:

• Local expenditure
• political budget cycles
• fiscal autonomy
• decentralisation
• Poland

Acknowledgements

Grzegorz Kula gratefully acknowledges the support of the Polish National Science Centre, grant 2014/13/B/HS4/03204. All opinions expressed are those of the authors and have not been endorsed by the NSC. The authors greatly appreciate suggestions by the editor and two anonymous referees on previous versions of this manuscript. They also acknowledge helpful comments from Hans Pitlik, Konstantinos Pilpilidis, participants at the 32nd EALE Annual Conference in Vienna, the 24th Silvaplana Workshop in Political Economy, and the Fourth Polish Law and Economics Conference in Warsaw.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Since these topics are not the focus of this work, an interested reader should consult a recent survey by Martinez-Vazquez, Lago-Peñas, and Sacchi, and Sacchi et al. (2015).

2. Starting from 2014, the municipal council will also be elected in a first-past-the-post electoral design.

3. These provisions were in force until the end of fiscal year 2013.

4. In this work, we focus on opportunistic electoral cycles; therefore, this literature review does not mention the entirety of the literature on ideological aspects of local economic policies.

5. Currently in Poland there are 307 urban, 602 urban-rural and 1571 rural municipalities.

6. We have additionally tested specifications controlling for total revenue. Such specifications would allow to interpret the results as changes in budget deficits, since the municipalities, besides obtaining transfers and using own sources of revenues, are allowed to incur debt, issue bonds and run short-run deficits (Art. 217 of the Public Finances Act). The main conclusions remain unchanged.

7. Note that the elections are held in November.

Additional information

Funding

Grzegorz Kula gratefully acknowledges the support of the Polish National Science Centre [grant number 2014/13/B/HS4/03204].

Notes on contributors

Monika Köppl Turyna

Monika Köppl-Turyna is a senior economist at Agenda Austria and a lecturer at the Vienna University of Economics and Business. Her research interests include political economy, public choice and industrial economics.

Grzegorz Kula

Grzegorz Kula holds the Chair of Public Sector Economics at the Faculty of Economic Sciences of Warsaw University. His research interests are local governments, public economics and public administration.

Agata Balmas

Agata Balmas and Kamila Wacławska, who provided research assistance for this work, are graduate students at the University of Warsaw and ISCTE Lisbon.

Kamila Waclawska

Agata Balmas and Kamila Wacławska, who provided research assistance for this work, are graduate students at the University of Warsaw and ISCTE Lisbon.