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Fiscal Discipline and Asymmetric Adjustment of Revenues and Expenditures: Local Government Responses to Shocks in Denmark

Public Finance Review , Volume 30 (3): 208 – May 1, 2002

Details

Publisher
Sage Publications
Copyright
Copyright © 2002 by SAGE Publications
ISSN
1091-1421
eISSN
1091-1421
D.O.I.
10.1177/109114210203000303
Publisher site
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Fiscal Discipline and Asymmetric Adjustment of Revenues and Expenditures: Local Government Responses to Shocks in Denmark

Abstract

Fiscal discipline is a concern because of possible spending and deficit bias in fiscal and political institutions. This study investigates adjustments under fiscal federalism, concentrating on decentralized government in Denmark and allowing for a comparison with neighbors Norway and Sweden and with similar analyses of U.S. states. Fiscal adjustments are investigated as responses to shocks measured as deviations from budgeted current surplus. The econometric results show that local governments respond by compensating adjustment of tax rates and expenditures. The shock responses tend to be asymmetric. Positive shocks hardly affect the income tax rate, whereas negative shocks induce higher tax rates. The authors interpret the asymmetry as the result of spending pressure due to redistributive politics and show that political characteristics are important for tax determination. They conclude that the Danish design of controlling the local public sector avoids fiscal imbalances but allows a bias toward expansion.
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