The Relationship Between Revenues and Public Expenditures in Portuguese Municipalities: 2009-2017

Abstract

The recent global economic crisis has renewed the interest in the debate on the causality between public revenue and expenditure due to the important fiscal imbalances experienced by many countries, particularly in the euro area, and to the growing concerns about the sustainability of public finances. This paper analyses the dynamic relationship between local revenues and expenditures for 278 Portuguese municipalities in the 2009-2017 period. The empirical results of the unit root and cointegration tests and the estimation of vector error correcting models for panel data allow us to conclude that the two local fiscal variables, own revenues and total expenditures, adjust to achieve a balanced local budget balance in the long term. Thus, the results support the fiscal synchronization hypothesis, which argues that decisions on revenues and expenditures are carried out simultaneously by the fiscal authorities, which contributes positively to the sustainability of local government finances.