To What Extent Should Public Corporations Be Consolidated? Considering the Effects on Public Deficit and Debt in Spanish Municipalities

Abstract

The consolidation perimeter of the public sector is the most important line between the micro and macro systems of government accounting. This paper focuses on the public sector boundary and assesses the potential impact on key reported figures -such as the 'Maastricht' deficit and debt ratios -that would result from moving public corporations inside the perimeter of the consolidated general government sector, public corporations that currently lie outside the general government sector. After examining 90 Spanish local governments with populations of over 50,000 during the 2010-2012 period, our results show that including public corporations within the general government sector perimeter leads to substantial differences in deficit and debt ratios, and that these differences significantly increase the number of municipalities in violation of fiscal limits imposed by the government. We also find that municipalities' pre-and post-consolidation debt ratios are significantly different depending on the ruling party's political ideology.

Subnational Fiscal Consolidation: The Hungarian Path from Crisis to Fiscal Sustainability in Light of International Experiences

“…The employment of such institutions enables the municipalities to circumvent the constraints imposed on them to curb their deficit and indebtedness, and the debts thus generated can remain hidden from the central government. In their study, De Vicente Lama et al [8] demonstrated that the method of taking Spanish municipal businesses into account could have a heavy impact on municipalities' compliance with the financial regulations. They found that the businesses in municipal ownership are capable of converting the budget deficit into an off-budget item, thus making the local government fiscal situation unhealthy.…”

“…According to the literature, the level of subnational indebtedness may be influenced by the ideology of the current governing party and the stability of the power of municipal leaders. Based on Spanish data, Vicente Lama et al [8] found significant correlation between the ideology of the governing party and the extent of indebtedness. Other country studies, for example Seitz [17], who analysed the determinants of subnational deficits in Germany, did not find any significant impact on indebtedness from the political composition of local governments.…”