Fiscal Rules vs. Political Culture as Determinants of Soft Budget Spending Behaviors: Evidence from Italian and French Regions
IREF Working paper No. 1/2012
47 Pages Posted: 29 May 2012
Date Written: May 28, 2012
This paper analyses intergovernmental transfers in France and Italy to assess how soft budget spending behaviors may result from slacks in institutional constraints or from phenomena related to political culture, like administrative practices or implementation of rules. It innovates on the previous literature, which concentrated on single countries, by adopting a comparative perspective. We estimate two separate but identical autoregressive forecasting model on French and Italian data to evaluate the extent to which regional administrators of each country can expect to be bailed out given the fiscal rules and institutions they face. This allows to proxy the bailout expectations in both countries and their role in determining soft budget spending behaviors. A larger impact of expectations is taken as evidence of greater discretion in fiscal decisions over and beyond the formal fiscal rules in place, evincing a more lax political culture. The estimates indicate that soft budget constraints and bailing out expectations are a quantitatively important component of local government spending in both countries, regardless the different degrees of stringency of fiscal rules and the type of grants and expenditures (total, current and capital) examined.
Keywords: Comparative analysis, Institutions, Expectations, Intergovernmental relations, Transfers, Local public spending, Bailing out
JEL Classification: H71, H73, H77, D78, P43, P48, P52
Suggested Citation: Suggested Citation