Financial decisions, intergovernmental grants and regulatory instability

In consequence of global financial crisis, central states implemented a range of recovery plans, austerity measures and cutback strategies creating significant challenges to local governments. This article studies the influence of (adverse) national adoptions in the fiscal regulatory framework on local revenues and expenditures. Building on economic theory, we evolve a set of hypothesis on local fiscal policies. To test those ones, we use panel regressions of more than 1.000 Italian municipalities over the 2008 to 2015 period. Italy is a particular suitable case for this research, as financial crisis hit intensively and central government implemented multiple changes in the institutional framework creating essential instability for local governments. Overall, Italian municipalities show specific patterns of financial decisions in reaction to revenue grants, i.e. positive effects on current and capital expenditures and on own revenues. We also found that changes in the legal and financial framework influenced patterns for capital and personnel expenditures, suggesting that certain patterns of reaction are more contingent than other ones. Moreover, this study contributes to the understanding of regulatory instability on local level decision-making, showing that instability cancels the influence of some usual determinants.