Determinants of Fiscal Slippages in Portuguese Municipalities

In Portugal, a new Local Finance Law was adopted in 2013. The objective was to involve the local governments in the compliance with the supranational fiscal rules imposed by the Stability and Growth Pact and with the national budgetary targets set under the Financial Assistance Program. In this paper, we present a set of stylized facts concerning the importance of local finance in national public finances in Portugal compared to other European countries. In the econometric study, using OLS pooled models, we investigated the economic, political and institutional determinants of slippages in total revenue, total expenditure and local government budget, for the 278 municipalities of Portugal in the 2010-2012 period. We conclude that the revenue and expenditure forecasts should be based on the accrued revenue of the previous year and that significant differences between those values should be justified by local authorities to avoid biased forecasts. Simultaneously, at the implementation stage, the committed expenditure should take into account the accrued revenue of the current year. Recent legislative changes can improve the expenditure execution, but they seem insufficient to prevent the optimistic bias of forecasts.