The constrained politics of local public investment under cooperative federalism

Abstract

Public investment spending declined steadily in advanced economies during the last three decades. Germany is a case in point where the aggregate decline coincided with growing inequality in investments across districts. What explains the variation in local investment spending? We assembled a novel data set to investigate the effects of structural constraints and partisanship on German districts’ investment spending from 1995 to 2018. We find that the lack of fiscal and administrative capacity significantly influences local investment patterns. Yet, within these constraints, partisanship matters. Conservative politicians tend to prioritize public investment more than the left. This is especially the case when revenues from local taxes are low. As the fiscal conditions improve, left-wing politicians increase investment more strongly and hence the difference between the left and the right disappears. Our findings are indicative of how regional economic divergence can emerge even within cooperative federal systems and show that, even when decision-makers operate under various institutional and structural constraints, partisanship matters for how these actors allocate discretionary spending.

Investing in the knowledge economy: The comparative political economy of public investments in knowledge‐based capital

“…Adverse economic conditions thus make it harder for governments to invest in the digital future. This is in line with the recent literature which finds a detrimental effect of austerity on investment spending (Bremer et al, 2021;Breunig & Busemeyer, 2012;Ronchi, 2018;Streeck & Mertens, 2011). I also find that unemployment has a positive (within) effect on investment spending.…”

“…Future research could look at how corporatism and trust co‐produce future‐oriented policies as corporatist arrangements can both create mutual trust but trust can also grease the wheels of or sustain corporatism. I also find that austerity has a negative effect on investment spending, while the partisan composition of government does not seem to have an effect (anymore) – although this might be different at the local level or under specific conditions (Bremer et al., 2021).…”

“…This paper sets out to explain this variation. For while political scientists have made important inroads into explaining the politics of investment policies (Beramendi et al., 2015; Boix, 1997; Bremer et al., 2021; Busemeyer, 2009; Finnegan, 2022; Garritzmann & Seng, 2016; Jacques, 2021; Jensen, 2011), the literature falls short in three ways.…”

Entrepreneurs beyond neoliberalism: Municipally owned corporations and climate change mitigation in German cities

“…in determining multipliers to national minimum business tax rates), structural factors (especially capital mobility) limit the scope for revenue hikes. One result is that many municipalities (particularly in Northern and Western regions) cut their remaining discretionary expenditures, especially public investments (Bremer et al, 2023). To limit the decay of local infrastructures and maintain some operational capacity, MOCs offered an escape route.…”

Greening Europe

“…During the last ten years Baden-Württemberg, Bavaria, Saxony and in most years Hamburg exhibited public investment above the German average, whereas public investment in North Rhine-Westphalia and Saarland was the lowest among all states excluding the three city states. Besides a weak revenue base, high social spending is a major contributor to low municipal investment (Beznoska and Kauder 2020;Bremer et al 2021). It has also contributed to the high liquidity credits.…”