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Sustainability of local government debt: a case study of Austrian municipalities

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  • Johann Bröthaler
  • Michael Getzner
  • Gottfried Haber

Abstract

Austrian municipalities face manifold challenges with respect the sustainability of their budgetary policies, especially concerning public (municipal) debt. On the one hand, municipalities are closely monitored and supervised by upper-level governments. Local borrowing is confined to pre-defined cases with respect to extra-ordinary expenditure. Both dimensions come close to constitute an at least soft debt limit (budget constraint) for municipalities. On the other hand, municipal discretion over expenditure and revenue is limited. In the current paper, we test whether municipalities’ budgetary policies were sustainable by means of an adapted version of Bohn’s (Q J Econ 113:949–963, 1998 ) sustainability test. We find that municipal debt limits were quite effective and resulted in stationary debt levels, and in significant and sufficient reactions of the municipal primary surplus to increasing public debt. However, in order to achieve such sustainable policies, municipalities have widely cut investments in local infrastructure. From a long-term perspective, such development is problematic with respect to the quality of available infrastructure. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Johann Bröthaler & Michael Getzner & Gottfried Haber, 2015. "Sustainability of local government debt: a case study of Austrian municipalities," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 42(3), pages 521-546, August.
    • Handle: RePEc:kap:empiri:v:42:y:2015:i:3:p:521-546
    DOI: 10.1007/s10663-014-9261-3
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    2. Köppl–Turyna, Monika & Pitlik, Hans, 2018. "Do equalization payments affect subnational borrowing? Evidence from regression discontinuity," European Journal of Political Economy, Elsevier, vol. 53(C), pages 84-108.
    3. Florian Brugger & Jörn Kleinert, 2019. "The strong increase of Austrian government debt in the Kreisky era: Austro-Keynesianism or just stubborn forecast errors?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 46(2), pages 229-248, May.
    4. Laszlo Vasa & Szilard Hegedus & Csaba Lentner, 2021. "Debt Dynamics Among European Municipalities and Their Organizations: Comparative Analysis with Focus on Hungary," European Research Studies Journal, European Research Studies Journal, vol. 0(1), pages 622-645.
    5. Halebić Jasmin & Moćević Amina, 2020. "Analysis of Public Debt at Subnational Government Levels: Evidence from Cantons in the Federation of Bosnia and Herzegovina," South East European Journal of Economics and Business, Sciendo, vol. 15(2), pages 109-123, December.
    6. Rubo Zhao & Yixiang Tian & Ao Lei & Francis Boadu & Ze Ren, 2019. "The Effect of Local Government Debt on Regional Economic Growth in China: A Nonlinear Relationship Approach," Sustainability, MDPI, vol. 11(11), pages 1-22, May.
    7. Michael Getzner, 2022. "Socio-economic and spatial determinants of municipal cultural spending," Journal of Cultural Economics, Springer;The Association for Cultural Economics International, vol. 46(4), pages 699-722, December.

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