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Local debt: from budget responsibility to fiscal discipline

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Abstract

In the past thirty years, local governments in most European countries have been granted at least limited access to borrowing. The rules in force include limitations on the amount of borrowing and/or debt service, restrictions on the purpose of debt and on borrowing from foreign institutions and/or from the central bank. The description of these rules and sanctions constitute the thrust of several academic studies on local borrowing and debt. What are the ingredients that make it work efficiently? Fiscal discipline is not a simple question of having or not rules limiting deficits and debt. From "soft" to "hard" budget constraints, there are various degrees of severity. Dafflon (1995, 1996) proposed a catalogue of ten key issues that might help local policymakers examine their budget management practices upon whether they promote budget responsibility or not. The catalogue also permits to qualify the budget constraint from "soft" to "hard" whether it is self-imposed or imposed top-down. Based on these arguments, we consider budget discipline versus budget responsibility. Budget discipline is a forced and constraining approach to obtaining a balanced budget at decentralised levels. The corresponding positive approach is budget responsibility. The balanced budget as a result of a prudent and proactive budget policy through which local governments adjust their investment policy to their real fiscal capacity and assess costs and benefits of each capital programmes in advance, in order to avoid excessive debt.

Suggested Citation

  • Dafflon, Bernard, 2010. "Local debt: from budget responsibility to fiscal discipline," FSES Working Papers 417, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland.
  • Handle: RePEc:fri:fribow:fribow00417
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    File URL: http://doc.rero.ch/record/27895/files/WP_SES_417.pdf
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    Citations

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    Cited by:

    1. Lenka Maličká, 2017. "Determinanty zadĺženosti miestnych samospráv Slovenskej republiky [Determinants of the Municipal Indebtedness in the Slovakia]," Politická ekonomie, Prague University of Economics and Business, vol. 2017(3), pages 301-315.
    2. Vasvári, Tamás, 2019. "Decentralizáció és költségvetési korlát. Miért fontos, hogy a haszonélvezők viseljék a költségeket? [Decentralization and budget constraints. Why should costs be borne by those benefiting from them," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(9), pages 932-959.
    3. Aldona Standar & Agnieszka Kozera, 2020. "Identifying the Financial Risk Factors of Excessive Indebtedness of Rural Communes in Poland," Sustainability, MDPI, vol. 12(3), pages 1-25, January.
    4. Agnieszka Kozera & Aldona Standar & Łukasz Satoła, 2020. "Managing Rural Areas in the Context of the Growing Debt of Polish Local Government Units," Agriculture, MDPI, vol. 10(9), pages 1-25, August.

    More about this item

    Keywords

    accountability ; fiscal discipline ; fiscal responsibility ; local public debt ; balanced budget ; borrowing ; golden rule ; pay-as-you-use ; indebtedness ; debt service ; debt ratio;
    All these keywords.

    JEL classification:

    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing

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