AN EMPIRICAL ASSESSMENT OF THE MUNICIPAL FINANCIAL SITUATION IN SPAIN

Public finance theories state that both political and socioeconomic factors must be considered in order to explain governments' finances. On the one hand, "partisan politics matters'' thesis argues that progressive parties contribute to increase public deficit. On the other hand, Roubini and Sachs' weak government hypothesis (1989a, 1989b) states that the higher the government fragmentation, the higher spending, deficit and debt. Accordingly, our work evaluates whether municipal ideology and political strength have an impact on public expenditures and taxes. With this aim, we analyze a representative sample of Spanish municipalities (2,729) for the year 2005. We find an influence of the size of the political majority on the municipal financial situation. However, we do not find evidence of the impact of the government's political ideology. Economic and population variables are found highly significant. Our data also show a "flypaper'' effect in the Spanish municipal sector.