The impact of population size on the risk of local government default
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The impact of population size on the risk of local government default Dionisio Buendía‑Carrillo1 · Juan Lara‑Rubio1 · Andrés Navarro‑Galera1 · María Elena Gómez‑Miranda1
© Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract Since the outbreak of the international economic crisis in 2008, governments’ fiscal policies have been strongly influenced by high levels of public debt and default. Studies of the causes of debt problems for large local governments have emphasised the interest and timeliness of identifying factors that may influence the probability of municipal default, and have concluded that fiscal policies should be defined according to population size. The present empirical study was conducted on a sample of 1476 local governments, with data for the period 2009–2014, to determine the influence of financial, socioeconomic and population factors on default risk in small, medium-sized and large municipalities. The results obtained show that the factors that influence the risk of default vary according to the size of the municipality, although some are common to all or most cases, such as real estate taxes, vehicle taxes, financial autonomy and per capita income. The main elements found to vary according to municipal size are overall immigration, female immigration, female unemployment and proximity to the next elections. Our findings show that the financial risk of local governments is affected not only by population size but also by financial and socioeconomic variables. These results can help policymakers to design fiscal policies appropriate for the size of each municipality, thus contributing to avoiding bankruptcy, cuts in public spending and tax increases. Our study findings may be of interest to politicians, managers, fiscal authorities, central governments, supervisory bodies, financial institutions, banks, voters, taxpayers and users of public services. Keywords Default risk · Local government · Population size effect · Basel regulation
* Juan Lara‑Rubio [email protected] 1
Department of Financial Economics and Accounting, Faculty of Economics and Business Studies, University of Granada, Campus Universitario de Cartuja, s/n, 18071 Granada, Spain
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Vol.:(0123456789)
D. Buendía‑Carrillo et al.
JEL Classification C33 · H72 · H74
1 Introduction Academic researchers and international organisations concur that the economic crisis provoked a worrying increase in bank debt in European countries such as Italy, Greece, Ireland, Portugal and Spain, and significantly influenced subsequent fiscal policies. In all these countries, local governments (LGs) were severely affected by problems of solvency, reduced sustainability of public services, financial insufficiency, budget deficits and cuts in spending on essential services. These constraints severely limited governments’ decision-making options and hampered fiscal policies, regarding both income and expenditure (Cohen et al. 2017b; EU 2015; FASAB 2014; Greer 2016; IMF 2014; Kluza 2017; Moody’s, 2013; Navarro-Galera et
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