Do Political Factors Affect the Risk of Local Government Default? Recent Evidence from Spain

Abstract

High levels of debt, provoked by a situation of economic and financial crisis, constitute a major threat to the financial sustainability of governments in the euro zone and in many other parts of the world. This delicate state of public finances also affects local governments and has led researchers to study the variables that influence the volume of bank debt. However, few have specifically analysed the causes of local government default, although it has provoked spending cutbacks and tax increases in many countries. The aim of this paper is to examine political factors that may increase the risk of local government default. Using a logit model for panel data and applying the Basel II rules, we studied the financial performance of large local Spanish governments for the period 2006-2011. Our empirical findings reveal four political factors that may increase the risk of default (the mayor’sknowledge of finance and economics, a low percentage of women councillors, a left-wing ideology and ideological alignment with the regional government).These findings are of great interest for stakeholders who may be affected by local government default, including voters, taxpayers, users of public services, managers, policymakers, financial institutions, creditors, fiscal authorities and central government.

Local government debt in Spain: Spatial effects and bugetary stability

“…In turn, authors like Amanatullah et al (2010) found evidence of different management styles between men and women and as a consequence, different outcomes and performances. -Galera et al (2017), however, found that the mayor's gender was not a statistically significant factor in the risk of local government default. In light of the differences in management behaviour between men and women, in this study we analyse whether there are differences in local government management that may be attributed to the gender of the governing leader.…”

“…It is therefore of interest to analyse how this change in the legislation might have affected compliance with the restrictions established in the LOEPSF. In this vein, Navarro-Galera et al (2017) found that having a higher proportion of women councillors helps to reduce the risk of local governments failing to meet their financial obligations. Geys and Revelli (2011) observed a positive relationship between the number of women councillors and the combination of tax revenues in municipalities.…”

“…Svaleryd (2009) confirmed that political ideology is correlated with budget preferences. Navarro-Galera et al (2017) showed that progressive parties incur higher expenditure, debt and deficit than conservative parties, concluding that local governments controlled by progressive parties may have a higher risk of non-compliance with restrictions. Vila (2012) observed that conservative governments are more likely to fail to meet legal debt limits than progressive governments.…”

“…This law implemented a set of governing principles that would guarantee budgetary stability and financial sustainability at all levels of public administration, thereby strengthening the trust, security and stability of the Spanish economy within the EU framework. Three interrelated dimensions are involved in local government financial sustainability: public expenditure, debt and deficit (Navarro-Galera et al, 2017). One of our aims in this chapter is therefore to analyse the behaviour of these three dimensions in order to examine how they might affect the risk of local governments' non-compliance with the principles of local government budgetary stability and financial sustainability as defined in the LOEPSF.…”

“…Current changing trends resulting from the modernisation of administrative structures are driving the need for research on differences in political leadership of women and men as part of wider changes in local government management (Broussine & Fox, 2002;Ryan et al, 2005). In this line, Navarro-Galera et al (2017) find that the composition of local governments can affect the risk of their non-compliance with legal limits. Slegten et al (2018) demonstrate that female and male politicians have different preferences at the local government level in Belgium.…”