Interconnections Between The Economic Structure Of Local Spending And Economic Growth In Romania

The issue of the effects of government interventions, explicitly of the taxes and expenditures of local public authorities, has generated substantial debate over time, and still gives rise to numerous controversies in theory and practice. Following the Keynesian path of reasoning, it is, at least theoretically, admitted that it is possible to influence the socio-economic activities and support for economic growth by means of government spending, but different other factors act towards enhancing or, on the contrary, impeding the achievement of the desired effects. From this point of view, the delimitation of competences and public expenditure responsibilities between different levels of government raises the issue of some possible different effects of the central and local governments’ interventions. As the macroeconomic stabilization function is usually associated with central governments, and the contribution of local governments often is of lesser importance, less attention is paid to the effectiveness of local administrative actions. In such a context, the paper aims to empirically evaluate the effects of the economic structure of local public expenditures on the local (territorial) economic growth in Romania, over the period 2007 to 2012. The analysis has been conducted at the level of the 42 Romanian counties and on annual data collected from both international and national sources (World Bank, INSSE, The Romanian Ministry of Regional Development and Public Administration).The general method of estimation is the fixed effects estimation technique for panel data models. Our empirical approach is of absolute novelty, especially for Romania, where previous empirical studies have been focusing on the assessment of the overall effects of general government spending. The main findings of our study are that local public expenditures have a negative impact on territorial economic growth, confirmed both for overall expenditures and for various structural components (given the economic structuring of local spending). Striking appears to be the negative impact of the interest payments on local public debt, which calls for the improvement of local government debt management and the selection on the basis of efficiency criteria of local investment projects, in many cases financed by debt issuing. At the same time, the very significant negative impact of social expenditures, currently mandatory expenditures of local governments, draws attention to the need to reconsider public policies and the relationships between different public budgets. Our findings also confirm the unproductive character of local transfer and goods and services expenditures, for which the results are to be interpreted as an alert signal to Romanian local authorities.