Exploring the causality between transparency and public finance indicators among Spanish local governments to improve competitiveness

Transparency of public finances plays a crucial role in making local governments more competitive and their management more efficient. In order to increase the competitiveness and development of local governments, this paper investigates the relationship between expenditure, revenues, and the transparency index in Spanish municipalities. The period analyzed includes all those years in which data on municipal transparency was collected by Transparency International (2008-2017). The findings from the panel data technique (Juodis, Karavias, and Sarafidis causality test; mean group and common correlated effects mean group estimators) and the ANOVA/linear dependent Dirichlet process mixture are useful for local policies. The results obtained show that there is interdependence in the actions of political managers and the characteristics of municipalities that have an impact on fiscal outcomes. The empirical results show that direct taxes and the transparency index are causally related in both directions. Transparency has a direct impact on direct taxes and an indirect impact on indirect taxes. Fiscal synchronization for direct taxes, indirect taxes and expenditure and spend-and-tax assumption for total revenues are supported. Transparency has a positive effect on deficit and debt, and political party exerts a causal effect on debt in municipalities governed by male mayors, while the unemployment rate is a cause for deficit in the case of mayors that are males. From the findings of this study, several important policy implications can be derived.