ORI GIN AL PA PER

Sustainability of local government debt: a case studyof Austrian municipalities

Johann Brothaler • Michael Getzner •

Gottfried Haber

� Springer Science+Business Media New York 2014

Abstract Austrian municipalities face manifold challenges with respect the sus-

tainability of their budgetary policies, especially concerning public (municipal)

debt. On the one hand, municipalities are closely monitored and supervised by

upper-level governments. Local borrowing is confined to pre-defined cases with

respect to extra-ordinary expenditure. Both dimensions come close to constitute an

at least soft debt limit (budget constraint) for municipalities. On the other hand,

municipal discretion over expenditure and revenue is limited. In the current paper,

we test whether municipalities’ budgetary policies were sustainable by means of an

adapted version of Bohn’s (Q J Econ 113:949–963, 1998) sustainability test. We

find that municipal debt limits were quite effective and resulted in stationary debt

levels, and in significant and sufficient reactions of the municipal primary surplus to

increasing public debt. However, in order to achieve such sustainable policies,

municipalities have widely cut investments in local infrastructure. From a long-term

perspective, such development is problematic with respect to the quality of available

infrastructure.

Keywords Municipal public debt � Local governments � Sustainability

of fiscal policies � Political economy of fiscal policies � Off-budget

debt

J. Brothaler � M. Getzner (&)

Center of Public Finance and Infrastructure Policy, Vienna University of Technology,

Resselgasse 5, 1040 Vienna, Austria

e-mail: Michael.Getzner@tuwien.ac.at

J. Brothaler

e-mail: Johann.Broethaler@tuwien.ac.at

G. Haber

Economic and Fiscal Policy Research Unit, Danube University Krems,

Dr.-Karl-Dorrek-Strasse 30, 3500 Krems, Austria

e-mail: Gottfried.Haber@donau-uni.ac.at

123

Empirica

DOI 10.1007/s10663-014-9261-3

1 Introduction

Besides the current public debt crisis of central governments of countries within the

Euro zone as well as outside Europe—e.g., the United States’ government recently

discussed limitations to the public debt—many Austrian municipalities and other

sub-national levels of government such as the federal provinces of Austria have

experienced dramatic problems in financing their local and regional public tasks,

such as the provision of regional and local infrastructure, services (e.g., child care,

schools), and communal public utilities (e.g., waste management). After the recent

economic and financial crisis, the levels and management of communal debt have

gained increased attention in the public debate. For instance, there are municipal-

ities that are under provisional (acting) management by the central government’s

commissioners who decide upon municipal expenditure in order to reduce public

deficits and debt. Municipal councils and/or mayors are often no longer in charge of

fiscal policies of their municipality for which they are elected since the respective

commissioner has a right of veto for all municipal expenditure. Such drastic

measures are undertaken to avoid the insolvency of municipalities which are no

longer capable of managing their public debt. While the European Union’s Stability

and Growth Pact, and more recently, the Fiscal Compact, regulate fiscal policies in

the Euro zone,1 and the European Financial Stability Facility (EFSF) and the

European Stability Mechanism (ESM) provide support for countries with over-

whelming fiscal problems under certain conditions, there have also been attempts on

the national level to implement such ‘‘stability compacts’’ as agreements between

the different levels of government. Austria’s stability compact prescribes limits to

national, regional (provincial) and local fiscal policies in terms of surpluses to be

achieved and acceptable levels of deficits. The Austrian Stability Compact (2013)

includes regulations, among others, on the coordination of budgetary policies

between different levels of government (central and sub-national governments, the

latter including federal provinces and municipalities), fiscal policy rules with

respect to structural deficits including a debt brake, limitations of the growth of

public expenditure, the public debt ratio (denoted in terms of the ratio to GDP), and

several other provisions for, e.g., limits to public liabilities.

With respect to sub-national budgetary policies, municipalities face additional

strict regulatory frameworks limiting their ability to borrow. As Sect. 3 below

describes in much more details, municipalities are budget-constrained with regards

to financing ordinary and extra-ordinary expenditure. For instance, municipal

borrowing has to be approved by the regional (provincial) government, and must not

impede the financial sustainability of municipalities. Thus, Austrian municipalities

face rather strict limitations to local borrowing, and a certain kind of balanced

budget rules. As historical evidence showed, debt limitations not only lead

municipalities to limit their borrowing, but also decrease the interest rate for

1 Besides stricter regulations on fiscal policies such as budgetary surveillance, coordination of economic

policies, procedures in the case of excessive deficits, the European Union’s ‘‘Six Pack’’ also includes

provisions for policies against macroeconomic imbalances.

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municipal debt if borrowers acknowledge the functioning of the debt limit (Dove

2014).

However, similar to national public debt, many municipalities have serious

problems concerning their public debt owing to both the recent economic crisis, and

past unsustainable fiscal policies. In addition, many municipal decision makers have

failed at implementing an efficient fiscal and debt management, for instance, by

ignoring of risks of issuing debt in foreign currency. Both aspects—lack of

sustainability of fiscal policies, and insufficient knowledge of financial mecha-

nisms—also suggest institutional weaknesses of communal fiscal governance.

Against this background, the current paper explores the sustainability of

municipalities’ fiscal policies based on Bohn’s (1998) concept of sustainable public

debt.2 Taking a unique data set on public debt of around 2,400 Austrian

municipalities over a time span from 1992 to 2010, we test whether municipal

decision makers pursued fiscal policies in several panel estimations. ‘‘Sustainabil-

ity’’ of public debt is defined as a sufficient reaction of the primary surplus of the

current year to increases of debt in previous years. Our setting allows for testing of

differences of budgetary policies between municipalities of different size (e.g.

population, institutional capacities), location and geography, and of different

politico-economic attributes (e.g. regional economy, ideology of the ruling

majority) (cf. Neck and Getzner 2001; Brothaler and Getzner 2010, 2011; Haber

and Neck 2006).

The aim of this paper and its empirical analyses are therefore;

• testing for the sustainability of municipal debt (according to an adapted version

of Bohn’s sustainability test);

• exploring the determinants of budgetary policies in terms of socio-economic and

political differences between municipalities; and

• discussing off-budget strategies of municipalities, and the consequences of

municipal austerity policies on communal infrastructure.

The paper is structured as follows: Sect. 2 provides a brief overview of studies

dealing with municipal budgetary policies in terms of sustainability. Section 3

describes the legal frameworks for municipal budgetary policies, especially

concerning borrowing, and includes the descriptive evidence. Section 4 presents

the econometric analysis with respect to testing the sustainability of budgetary

policies of Austrian municipalities. Section 5 further discusses issues of privatiza-

tion, outsourcing and off-budget debt that may contribute to a more thorough

conclusion of the sustainability of municipal debt. Finally, Sect. 6 discusses the

results and concludes.

2 In this paper, we have chosen a certain methodological approach; of course, Bohn’s sustainability test is

only one out of a wide range of possible approaches. The European Commission observes sustainability

indicators which may be considered more policy-oriented with respect to balancing the structural budget

and aiming at reducing public debt. For instance, the Commission’s S1 indicator assesses the medium-

term challenges to reach the 60 % debt-to-GDP ratio, while the S2 indicator computes the requirements

for the primary surplus to fulfill the government’s intertemporal budget constraint (e.g., European

Commission 2012).

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2 Sustainability of public (municipal) debt: methods and empirical studies

As briefly discussed in the introduction, all levels of government are currently

facing an enormous pressure on consolidating their budgets. However, the scientific

debate on the sustainability of public debt has not only emerged recently but gained

momentum especially since the 1970s when many European countries faced

increasing public debt after the oil price shock. Later, scientific research was

focused on to the introduction of the common Euro currency including the

Maastricht criteria oriented towards sustainable fiscal policies.

There are many approaches towards empirically testing the sustainability of

budgetary policies. For Austria, a number of approaches were used such stationarity

tests of public debt, the Generalized Flood-Garber Test (e.g., testing for the

fulfillment of the intertemporal budget constraint), and Bohn’s test of sustainability

(Bohn 1998; Haber and Neck 2006; Getzner et al. 2001; cf. Greiner and Semmler

1999; Grossmann et al. 2008) assuming sustainability, if the primary surplus

positively reacts (i.e., is increased) to debt rising in the previous period. While the

approaches mentioned before require some assumption about the interest rate,

Bohn’s test is somewhat different as it estimates a reaction function of the primary

surplus to increases in public debt, and therefore does not require assumptions about

the adequate interest rate.

In the current paper, we employ an adapted version of Bohn’s sustainability test

complemented with ascertaining (panel) stationarity of communal debt. While Bohn

(1998) estimated the reaction of the primary surplus-to-GDP ratio with respect to

changes of the (lagged) debt-to-GDP ratio of the central government, our research

question concerns the debt of Austrian municipalities. As described below, we have

to adapt Bohn’s test in light of available data. For instance, we do not have a ready-

made reference (base-line) similar to national (or regional) GDP at the municipal

level.3 We therefore have to deal with per capita values of surplus and deficit (all

values of (annual) per-capita municipal debt and surpluses are denoted in constant

2005 prices), plus a number of additional explanatory variables accounting for the

diversity in economic and political environments of municipalities (cf., e.g.,

Roubini and Sachs 1989). The empirical equation to be used is the following:

si;t ¼ qdi;t�1 þ a0 þ ai þ AZi;t þ et; ð1Þ

where si,t is the primary surplus of municipality i at year t, di,t-1 denotes public debt,

and a0 and ai are the constants. Zi,t is a vector of other (economic or political)

determinants including, for instance, population, regional unemployment and GDP,

the interest rate, and a political variable (see Table 1 for a detailed description of all

variables). et is the error term. All variables are calculated as ratio to (current) GDP

in Bohn’s (1998) original test, but are used in the current paper as per-capita values

(natural logs). Table 1 highlights the economic reasoning for inclusion of the major

explanatory variables in Eq. (1) and the subsequent operationalization in the

3 In addition, a municipal ‘‘income variable’’ might not be of much interest since a large share of the

Austrian population earns income outside of their place of residence, i.e., in other municipalities. A

reference of the residential municipality to the income earned outside the municipality might thus

significantly distort the empirical analysis.

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Table 1 Dependent and explanatory variables

Dependent variable Arguments (references) for inclusion of the

variable

Sit Primary surplus of municipality i at time t;

computed by adding up the current surplus

and interest payments on municipal debt, at

2005 prices (EUR/capita; natural log)

The primary surplus is considered as one of the

central indicators for the sustainability of

budgetary policies (e.g., Fincke and Greiner

2011; European Commission 2012;

Balassone et al. 2009)

Explanatory variables Arguments (references) for inclusion of the

variable

Dit-1 Debt of municipality i at time t; 2005 prices

(EUR/capita; natural log)

A positive coefficient would be a necessary

(but not unconditionally sufficient) indicator

for fiscal sustainability according to Bohn’s

(1998) sustainability test (cf., Fincke and

Greiner 2011; for the sustainability of

Austria’s central government’s budget, see

Getzner et al. 2001)

Popit Number of residents of municipality i at time

t (natural log)

The size of a municipality may influence

budgetary policies (at least) in two ways: (1)

larger municipalities (cities) face different

tasks (infrastructure) to be provided to a

region (e.g. regional or district capital), and

may also bear lower or higher costs

compared to smaller municipalities (for

Austria: Brothaler et al. 2002); (2) free-rider

behavior may be more pronounced in larger

communities, thus influencing budgetary

policies (e.g., Mueller 2003)

URit Unemployment rate of municipality i at time

t taken from the Austrian Labor Market

Service for the labor market district in which

municipality i is located (%)

Including the unemployment rate as well as

deviations of GDP as explanatory variables

is based on the notion of anti-cyclical fiscal

policies; for Austria, fiscal policies are—

among other determinants—influenced by

such economic policies (see, e.g., Haber and

Neck 2006)

GDPit Regional GDP (gross domestic product) of

municipality i at time t at 2005 prices for the

sub-national (NUTS3) region in which the

municipality is located (EUR/capita; natural

log)

IRit Real interest rate level on federal public debt

(%)

Increasing the costs of debt is hypothesized to

lead to a lower demand for municipal credits

or loans; therefore, a positive coefficient

(higher interest rates lead to a higher primary

surplus) is expected (cf. Escolano 2010)

APPit Share of votes for the Austrian People’s Party

in the municipal elections of municipality i at

time t (%)

The political economy in terms of ideology of

the ruling party may influence the

municipality’s primary surplus; as the

Austrian People’s Party can be considered a

conservative party, it may be hypothesized

that municipalities led by a conservative

majority are more concerned about the size

and debt level of the public (municipal)

sector (cf., Roubini and Sachs 1989)

Source authors’ own compilation, 2014 (data: Statistics Austria 2011)

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empirical estimations, and accounts for the underlying hypotheses regarding the size

and direction of the influence of the explanatory variables on the dependent variable

(the municipal primary surplus).

If the reaction of the primary surplus to an increase of debt in the previous period

is positive and significant (parameter q in Eq. (1)), debt sustainability would be

fulfilled according to Bohn (1998). However, the question certainly arises which

reaction of the primary surplus to increasing debt might be considered as

‘‘sufficient’’ in terms of stabilizing (or even decreasing) the debt levels. As

Lukkezen and Rojas-Romagosa (2012) showed, the size of the reaction coefficient

may vary considerably between countries. Scholars have pointed out that

‘‘sustainability’’ according to Bohn’s test may also be consistent with increasing

debt levels (see, e.g., Ghosh et al. 2011). Thus, stationarity of debt levels over time

is an important additional indicator of debt sustainability.

There has not been much emphasis on municipal public debt in the scientific

literature. While the current debate in Europe concentrates on debt and deficits of

central governments, municipal debt policies have nearly been neglected. In the US,

the debate seems to be more pronounced, for instance, with respect to fiscal policy

adjustments of municipalities, or the functioning of debt limits (cf. Dove 2014)

similar to the one currently discussed and implemented in the Euro zone. For

instance, Buettner and Wildasin (2006) explored the fiscal adjustment policies of US

municipalities in a panel setting and included variables such as different revenues

categories, and grants. The sustainability of municipal debt has largely been

achieved by cutting municipal expenditure. However, the authors also emphasized

the importance of intergovernmental grants for easing fiscal stress of municipalities

(cf. also Buettner 2009). Recently, Mahdavi and Westerlund (2011) tested whether

formal fiscal policy rules resulted in sustainable municipal debt policies. The

authors found evidence broadly consistent with the expectation that fiscal policy

rules had positive effects on the sustainability of municipal debt (cf., Lima et al.

(2008) for Brazilian municipalities).

Closely connected to sustainability and adjustment policies of municipalities is

the ability of municipalities to issue bonds to finance investments. For instance,

Metcalf (1993) analyzed the determinants of issuing municipal bonds and finds that

federal tax rates were of high significance. Poterba and Rueben (2001) additionally

underlined the importance of fiscal regulations and rules (such as balanced-budget

rules) which are particularly important for the municipal bond market, and therefore

for the ability of municipalities to run deficits and build up public debt.

Restrictions on municipal debt (debt limits, balanced budget rules) have been

discussed widely. Regarding the effects on the sustainability of regional and

municipal debt, scholars have stressed the practical implications and limitations of

such regulations. For instance, Ganof (1984) analyzed the manifold problems in

implementing and enforcing debt limits which stem from the possibilities to

circumvent the regulations. Regarding default by municipal governments, Epple and

Spatt (1986) stressed the need to account for externalities in a federal system, and to

explore the optimal (efficient) limits to public debt. With respect to a diverse policy

framework including elements of direct democracy, Feld et al. (2011) found that

municipal debt of Swiss municipalities is also influenced by direct democracy rights

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and a higher degree of fiscal autonomy, while reformed guidelines for public

management were not found to reduce public debt.

Strategic debt and government weakness of Flamish municipalities were tested as

causes for unsustainable debt levels by Ashworth et al. (2005). The authors found

that short-term policies and the composition of municipal governments indeed led to

higher debt levels while they did not find evidence for the ‘‘weak government’’

hypothesis.

With respect to municipal credit rating, Hajek (2011) recently developed a neural

network methodology and tested empirically its implications by applying the model

to US municipalities. His methodology led to a high reliability in classifying

municipalities correctly regarding their ranking and credit rating.

3 Frameworks and descriptive analysis of municipal debt in Austria

3.1 The legal and institutional framework of local governments’ budgetary

policies in Austria

In Austria, federal and provincial (state) laws are in place that regulate the form and

structure of state and local budgets and closed accounts (cf. VRV 1997). As Thoni

et al. (2002) described, borrowing of local governments in Austria is strictly

regulated by frameworks which are drafted, implemented, administered and

monitored by the regional (state) authorities (governments of the federal provinces).

For instance, ordinary expenditure has to be financed by ordinary revenues. Local

borrowing can only be used for extraordinary and absolutely necessary spending

that is unusual in its nature and size (Thoni et al. 2002, 60 ff.). Borrowing is only

approved if there is no other type of financing available. Special emphasis is hereby

laid on the fiscal sustainability of municipal budgets; this means that repayment of

debt and interest must not endanger the financial stability of the municipality.

Interestingly, in assessing the financial stability of different levels of governments,

the Austrian constitution refers to negative external effects on other governments by

excessive debts.

All nine federal states (Bundeslander) in Austria have their own specific

regulations and laws governing municipal borrowing. In general, borrowing by local

governments requires approval by the supervisory authority of the government of

the federal province. Approval is also necessary for municipal guarantees

(liabilities) as well as for other financial obligations similar to debt issuance (e.g.,

leasing of equipment). However, in some provinces the supervising authority’s

approval is only needed if municipal debt exceeds certain limits. The main

weaknesses of these existing regulations certainly lie in the lack of strict sanctions if

targets are not achieved, and in the rather large leeway for interpreting debt rules. In

addition, there are many municipalities with their own regulations regarding

balanced budgets—mostly larger municipalities and statutory towns –, or the

prohibition of deficit spending. Thus, Austrian municipalities face a ‘‘not-too-hard’’

budget constraint which limits municipal borrowing (debt ceiling), complemented

by supervision by the provincial government.

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Further limitations to excessive municipal debt were also implemented by the

inner-Austrian Stability Compact which as been developed and refined during

recent years (1999/2005/2008/2011/2012; cf. Austrian Stability Pact 2013). These

regulations are binding for all levels of government in Austria and quantify debt

limits. Based on the European Growth and Stability Pact, and the European Fiscal

Compact, the Austrian Stability Compact includes provisions for the national

coordination of the budgets of the different levels of government, for the medium-

term orientation of all public budgets, and for the allocation of national convergence

criteria to all public budgets (breakdown of the targeted public deficit (as a ratio to

GDP) into all sub-sectors and levels of government); the compact also regulates the

information system for mutual reporting, and sanctions if targets will not be

reached.

Currently, upper limits for explicit and implicit liabilities such as guarantees for

state-owned companies (e.g., banks), or for exporting manufacturers, issued by

federal, provincial and local governments are in already place or are currently

debated (e.g., limits for public guarantees as a percentage of tax revenue or total

current revenue). Stricter regulations for assessing risks of guarantees granted by

governments may eventually be drafted (cf., Hauth and Grossmann 2013).

3.2 Development of municipal debt and primary surplus from 1992 to 2010

Budgetary policies (e.g., debt, surplus/deficit) of the general government and its

subsectors is basically ascertained and recorded according to the European System

of Accounts 1995 (ESA 95). Sub-national governments in Austria include two

levels, state and local governments; the latter include municipalities, non-market

off-budget companies, local authorities’ associations, and locally based cooperative

funds for public activities. Consistent and officially published time series data on

public debt of all levels of government in Austria are only available for 1992 to

2010.

For the descriptive and econometric analysis of municipal debt in Austria, we

have built up a panel data set for the period of 1992 to 2010 for all 2,356 Austrian

municipalities (excluding Vienna, which is a municipality and a federal province,

and can thus not be compared to all other municipalities). The data on revenue,

expenditure, and debt are based on administrative budgets (national public finance

statistics of municipal closed accounts; see Statistics Austria 2011). Consistent time

series are available for revenue, expenditure, and total financial debt. A breakdown

of municipal debt (e.g., by the financial instrument used, debt holder, maturity, or

currency) which could further provide a specific assessment of municipal budgetary

policies has only been ascertained in recent years, but is not yet published. We

therefore have to restrict our analysis to total municipal debt without being able to

differentiate the municipalities’ liabilities according to these categories. Municipal

debt (‘‘local debt’’) in this paper thus consists of debt accumulated by local

(municipal) governments; ‘‘local surplus/deficit’’ is based on municipal expenditure

and revenue (net of local borrowing) over time. Table 1 presents a detailed

description of all (dependent and explanatory) variables used in this paper, and also

sketches the arguments for including these variables in the estimations.

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Embedding the analysis in the current policy context of public debt of all levels

of government in Austria, Table 2 indicates that the largest share of public debt is

by far accumulated at the central government level. Figures suggest that a public

debt stock of around 63 % (ratio to GDP; 2012) is issued by the central government

(Republic of Austria), while provincial governments account for debt level of about

6 % (ratio to GDP). Local governments (municipalities including Vienna) account

for a stock of public debt of around 3 %. Including social security funds, the

Austrian public debt-to-GDP ratio amounts to 72.4 % in 2011 (about EUR 218bn at

current prices). The increase of debt in recent years clearly mirrors the policies

undertaken during the current economic and financial crisis such as automatic

stabilizers, and expenditure for growth programs and the stability of the financial

markets. At constant 2005 prices, public debt of Austrian municipalities (according

to ESA 1995) amounted to about EUR 12bn in 1995, and was reduced until 2010 to

roughly EUR 7.5bn. Significant contributions to this reduction were the ‘‘outsourc-

ing’’ of debt, and increases of off-budget debt such as newly established local

infrastructure companies financed mainly through user fees.4 However, Fig. 1 also

suggests that municipalities were also hit by the recent financial crises. In addition,

the figure indicates that the definition of public debt and the accounting approach

used to determine the development and the level of debt to be analyzed are of

crucial importance. The position of Vienna both as a municipality and a federal state

is clarified as well. Generally, the fiscal position of municipalities, of course, also

depends on the (Austrian) revenue sharing system. In the current paper, ‘‘local/

municipal debt’’ is thus operationalized by total debt of municipalities according to

the administrative budgets published officially.

Figure 2 presents the public debt of Austrian municipalities in different

population classes. While the development of debt over time seems to roughly

follow similar paths, it is nevertheless important to recognize the variation in the

relative shift of the level of debt between classes of population. For instance, small

municipalities carried a debt of around EUR 900 per capita in 1992 but faced the

largest increase in debt (103 %) up to around EUR 1,800 EUR per capita in 2010

Table 2 Public debt in Austria by subsector as a percentage of GDP, 1995–2010

Austria, % of GDP 1995 2000 2005 2010

Central government 58.2 60.8 58.5 62.6

State government 3.1 2.3 3.0 5.7

Local government 6.6 2.7 2.0 2.8

Social security funds 0.3 0.4 0.7 0.7

General government 68.2 66.2 64.2 71.8

Mio. Euro (curr. prices) 119,208 137,995 157,429 205,576

Consolidated gross debt of the general government at nominal values acc. to ESA 95 (Council Regulation

(EC) N� 479/2009)

Source Statistics Austria (2011), Eurostat (2011); authors’ own calculations, 2012

4 According to the usual definition, publicly owned companies may resort to the private sector if user fees

or other own revenues cover at least 50 % of total costs.

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(all figures in 2005 prices). The smallest increase in debt was encountered by

municipalities with 5,000 to 10,000 residents.

The increase in public debt of municipalities is leads to increasing expenditure

for debt repayment and interest. Figure 3 shows that Austrian municipalities spent

around EUR 400 m for debt repayment in 1992 (constant 2005 prices), and close to

EUR 1bn in 2010. However, Fig. 3 also indicates that interest payments remained

more stable suggesting that average interest rates for municipal debt decreased

significantly. Nevertheless, the 2008 financial crisis with peaking interest rates can

also be detected in the time series of interest payments.

Austrian municipalities faced a steadily decreasing primary surplus during the

observation period, congruent with the increases in public debt. In the period

between 1992 and 2010, the primary surplus (at constant 2005 prices) was divided

roughly in half from around EUR 2bn to under EUR 1bn (Fig. 4). At the same time,

the surplus of the fixed asset accounts deteriorated to an equal extent.

Regarding the structure of municipal debt, Table 3 shows that debt service is

predominantly financed by user charges which underlines the importance of (own)

revenues from municipal goods and services. The holders (creditors) of municipal

debt mainly are domestic banks and insurances companies, while there is a decrease

of local debt held by government units such as provincial governments reducing

granting of loans, but also of the disposal of outstanding debt to private financial

companies. No detailed data are published on further aspects of local debt structure.

A rough approximation based on the data in Table 3 indicates that municipal debt

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Mio

. Eu

ro (

2005

pri

ces)

Public debt of local government level (acc. to ESA95)

Total debt of Vienna (admin. budget)

Total debt of local governments excl. Vienna (admin. budgets)

Fig. 1 Public debt of local government level and total debt of local governments in Austria, 1992–2010,Mio. Euro (2005 prices). Public debt of the local government subsector according to ESA95(municipalities including Vienna, local funds, selected (non-market) corporations (extrabudgetaryunits), and selected local authority associations; but excluding debt of local quasi-corporations). Totaldebt of local governments (2,356 municipalities, Vienna) according to administrative budgets. SourceStatistics Austria (2011); authors’ own calculations, 2012

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has been issued mainly medium or long-term (initial maturity more than 1 year),

that municipal debt is mainly denoted in Euro, and that interest rates for municipal

debt are fixed (see also Grossmann et al. 2008).

3.3 Discretion and control of municipalities with respect to expenditure

and revenue

Before testing the sustainability of budgetary policies of Austrian municipalities in

econometric terms, it is useful—in addition to the descriptive evidence presented

above—to briefly describe the discretion and control of municipalities with respect

to their expenditure and revenues. Thus, the main question to be answered here is

whether and to what extent municipalities are able to control revenues and spending

in order to influence (regulate, decide upon) their local debt. An assessment of the

discretionary power of municipalities and the possible effect on municipal debt is

presented in Table 4 with reference to the economic structure of revenues and

expenditure. In 2010, the major expenditure categories were personnel (staff) cost,

expenses for goods and services purchased (public consumption), and (mandatory)

intergovernmental grants paid to the provincial government. These spending

categories roughly account for 73 % of municipal expenditure. In addition, gross

Size of municipality 1992 2010 %-change0-2,500 883 1,794 103.12,501-5,000 1,071 1,560 45.75,001-10,000 1,313 1,417 7.910,001-20,000 1,243 1,523 22.520,001-50,000 1,479 1,796 21.4over 50,000 1,267 1,449 14.3Total 1,118 1,609 43.9

0

500

1000

1500

2000

2500

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Eu

ro p

er c

apit

a (2

005

pri

ces)

0-2.500

2.501-5.000

5.001-10.000

10.001-20.000

20.001-50.000

over 50.000

Fig. 2 Total debt of local governments (excl. Vienna) in Austria by grouped by population size, 1992–2010,Euro per capita (2005 prices). Source Statistics Austria (2011); authors’ own calculations, 2012

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capital formation (investments) also is a major expenditure category with about

11 %. However, it is interesting to consider the relevance of the different spending

categories over time. In 1992, Austrian municipalities used to spend about 25 % of

0

200

400

600

800

1,000

1,200

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Mio

. E

uro

(20

05 p

rice

s)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Ave

rag

e in

tere

st r

ates

(%

)

Repayment of debt Interest Average interest rates

Fig. 3 Expenditure for debt repayment and interest (Mio. Euro, 2005 prices) and average interest rates(%) of debt of local governments (excl. Vienna) in Austria, 1992–2010. Source Statistics Austria (2011);authors’ own calculations, 2011

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

Mio

. E

uro

(20

05 p

rice

s)

Primary surplus of current account Surplus of fixed asset account

Surplus of current and fixed asset account

Fig. 4 Primary surplus of current account and surplus of fixed asset account of local governments (excl.Vienna) in Austria, 1992–2010, Mio. Euro (2005 prices). Source Statistics Austria (2011); authors’ owncalculations, 2011

Empirica

123

their budget on investments; this figure significantly decreased until 2010 while

intergovernmental grant payments grew by roughly 10 percentage points. Especially

in recent years (2009, 2010), municipalities reduced investments substantially in

order to balance their budgets. From an overall economic viewpoint, this significant

reduction of communal investments is highly problematic since municipalities

account for about 40 % of total public investment in Austria (cf. OGemB/OSB

2011).5

The discretionary power (autonomy) with respect to expenses is different

between categories. Regarding personnel and staff costs, the principal influence on

expenditure is rather high only in the medium term, while public consumption

allows rather short-term reactions. In contrast, discretionary power in the case of

grant payments to the state government representing an important expenditure

category is low. Investments can as well be decided rather autonomously. Decisions

on capital formation have an effect on borrowing requirements in the short term and

on the resulting debt services in the medium term. Thus, municipalities in general

have discretionary decision-making power on major expenditure categories;

however, the largest expenditure category cannot significantly be influenced.

Regarding revenues, Table 4 indicates that municipal revenues mainly consist of

shared taxes (about 30 % of total revenues) while the second largest revenue

category are current revenues for goods and services (mainly user fees for

communal infrastructure). Revenues based on own taxes account for roughly 17 %

5 Of course, computing this share depends on the data and assumptions used (especially concerning the

extent of outsourcing).

Table 3 Structure of local debt of local governments in Austria (excl. Vienna) as percentage of total

municipal debt, 1992/2000/2010

Structure of local debt 1992 2000 2010

Coverage: debt service financed by Percentage of total local debt

General budget funds (more than 50 %) 34 29 30

User charges (more than 50 %) 56 66 65

Other entities 10 6 4

Creditor: debt held by

Domestic banks or insurance companies 53 76 86

Government authorities or funds 47 21 12

Foreign banks and insurance companies 0 3 2

Rough estimatesa on

Debt by currency

National currency (EUR) 95

Foreign currency (mainly CHF) 5

Debt by interest rate conditions

Fixed interest rate 30

Variable interest rate 70

a Rough estimates are based on an evaluation of a small sample of municipalities by the authors

Source Statistics Austria (2011), authors’ own calculations, 2011

Empirica

123

of total revenues (with a decreasing trend over time) but cannot be influenced by

municipal decision-makers in the short term. Discretionary power is highest with

respect to current revenues for municipal goods and services, and can thus also have

a significant effect on the municipalities’ primary surplus in the short run.

Table 4 Economic structure of revenue and expenditure of local governments in Austria (excl. Vienna;

1992/2010): assessment of financial discretionary power of municipalities (low/medium/high influence;

short-/medium-/long-term effects on expenditure/revenue)

Expenditure (% of total) 1992

(%)

2010

(%)

Principal influence

(discretionary power)

Size of effects on

expenditure over time

Personnel costs 21 21 High Medium

Current expenses for goods and

services (public consumption)

22 25 High Short

Interest payments 3 1 Medium Medium

Current grants paida 17 28 Low Long

Gross capital formation 25 11 High Short

Capital grants paid 3 4 High Short

Debt redemption 4 6 Medium Medium

Other expendituree 6 4 High Short

Sum 100 100

Total (EUR m, current prices) 9,149 16,161

Revenue (% of total) 1992 (%) 2010 (%) Principal influence

(discretionary power)

Size of effects on

revenues over time

Current revenues for goods and

servicesb22 26 High Short

Own taxesc 21 17 Medium Medium

Shared taxesd 29 30 Low Medium

Current grantsd 8 7 Low Medium

Disposal of non-financial assets 2 2 High Short

Capital grants 5 7 Low Short

Borrowing (debt issuance) 9 7 Medium Short

Other revenuese 4 5 High Short

Sum 100 100

Total (EUR m, current prices) 9,154 16,229

a Grants of current account mainly paid to the provincial government level (and regulated by provincial

law)b Current revenues for (market and non-market) goods and services including capital income (interest,

rent)c Revenues from own taxes (levied by municipalities but regulated by national legislation)d Revenues from shared taxes and from grants based on the Austrian Tax Sharing System (negotiated

between the public authorities but regulated by the central government)d Acquisition/disposal of financial assets (shares), granting (exp.)/repayment (rev.) of loans, formation/

reduction of reserves

Source data on closed accounts of local governments (Statistics Austria 2011); authors’ own calculations

and assessment, 2012

Empirica

123

As Sect. 4 will show from an econometric viewpoint, the time series of municipal

debt is rather stationary, and sustainability according to Bohn’s (1998) concept

(Eq. 1) is roughly fulfilled in Austrian municipalities. While the principal influence

of municipalities on their expenditure and revenues is limited, the regulations

mentioned above in Sect. 3.1 with respect to local borrowing and debt, including the

Austrian Stability Compact, can be considered as a budget constraint for

municipalities in the sense of a real debt limitation.

In the following, we will test whether these increasingly strict regulations on the

limitation of municipal debt had an impact on municipal fiscal sustainability.

4 Econometric evidence on the sustainability of local debt

Before modeling the interlinkages and a ‘dose–response’ function for the

municipalities’ primary surplus reacting to increases in public debt according to

the adapted version of Bohn’s sustainability test presented above, we ascertained the

characteristics of the time series of the two central variables. As described in

Table 1, the main variables include the primary surplus, the municipalities’ debt,

population, the unemployment rate, regional GDP, the real interest rate (level) of

Austrian public debt, and the share of votes for the conservative Austrian People’s

Party.

In order to test for stationarity, we ascertained the attributes of the time series of

the primary surplus and the public debt in more detail. The results presented in

Table 5 indicate that the two main variables are stationary time series variables. The

table summarizes the results of a range of panel stationarity tests with two basic

specifications of the estimations, one with only an individual intercept, and one with

an intercept and a trend. The hypothesis to be tested, H0, is twofold. In the upper

part of the table, H0 assumes a common unit root process for the cross-sections,

while the lower part of the table presents testing results for H0 denoting individual

unit root processes. All tests indicate that the hypothesis of non-stationarity is

rejected at significance levels of p \ 0.01. Thus, all variables considered here are

I(0) variables.

This result is not only interesting regarding the econometric conclusions that can

be drawn, but it is also an important indication of sustainability of municipal

budgetary policies. Notwithstanding the rather limited period from 1992 to 2010,

stationarity of public debt indicates—contrary to the Austrian central government’s

public debt—that the Austrian municipalities’ liabilities exhibit a mean-reverting

tendency over the last years. Rather, public debt was stable at an average level of

about EUR 1,500 to EUR 1,900 per capita for 2010 (current prices), depending on

the population size of the respective municipality. In the discussion section below,

we will argue that a ‘‘debt limit’’ (‘‘debt brake’’) which is currently debated in

Europe with respect to the financial and debt crisis and the stability of the Euro as a

currency has restricted municipalities in their potential for borrowing which

consequently led to stationary debt levels.

We also tested the other potentially explanatory variables such as GDP, the

interest rate level, and the unemployment rate with respect to stationarity. Non-

Empirica

123

stationarity holds for the unemployment rate while GDP is stationary around a

deterministic trend. The interest rate decreased steadily and significantly over the

observation period, but is not stationary around a trend.

In order to develop our model estimation step-by-step, we start with the original

version of Bohn’s sustainability test (in our adapted specification) by including the

lagged debt variable as the only explanatory variable to the estimation. Est. 1 in

Table 6 shows a significantly positive coefficient for the variable Dit-1 suggesting

that an increase of real public debt led policy makers to undertake measures to

increase the municipality’s primary surplus by about 2 % in the subsequent year.

Together with the stationarity of municipal debt described above, this results is a

first indication of sustainable budgetary policies of Austrian municipalities. In order

to account for serial correlation, we included a (significant) AR(1) term in all

estimations.

In order to test whether municipalities with a larger population have a fiscal

policy advantage or disadvantage, we included a (quadratic) population term into

the estimation (cf. Est. 2 in Table 6). Larger municipalities may exhibit a different

response to increasing local debt compared to smaller ones. On the one hand, larger

municipalities (such as statutory towns or provincial capital cities) may have easier

access to provincial or national funds, and may also be stronger in economic terms

with respect to higher (own) revenues owing to the location of enterprises. On the

other hand, larger municipalities often have higher expenses accruing to their role as

providers of important infrastructure for the surrounding region.

Table 5 Panel stationarity tests of the dependent and explanatory variables

Sit (municipal surplus) Dit (municipal debt)

Statistic Statistic Statistic Statistic

H0: Unit root (assumes common unit root process)

Levin, Lin & Chu t*-

statistic

-81.57*** -92.64*** -33.07*** -95.82***

Breitung t-statistic -44.72*** 13.57***

H0: Unit root (assumes individual unit root process)

Im, Pesaran and Shin

W-statistic

-70.06*** -76.12*** -8.69*** -15.45***

ADF–Fisher Chi

square

14,119.4*** 13,885.4*** 6,736.76*** 6,280.50***

PP–Fisher Chi square 15,210.5*** 15,127.4*** 5,362.24*** 4,669.37***

Cross-sections

included

2,356 2,356 2,354 2,354

n (min.) 41,686 38,806 38,489 35,849

Test for unit root in Levels Levels Levels Levels

Equation with Individual

intercept

Individual intercept

and trend

Individual

intercept

Individual intercept

and trend

Conclusion I(0) I(0) I(0) I(0)

Source authors’ own calculations, 2011

Empirica

123

The estimation indicates that larger municipalities have an advantage in terms of

significantly higher primary surpluses. The effect of population size is clearly

diminishing which is indicated by the significantly negative quadratic term. The

descriptive analysis discussed above that highlighted the higher growth of debt of

smaller municipalities is thus corroborated. However, the significance and size of

the coefficients of the variable denoting population decreases with the inclusion of

additional variables in the estimation.

Table 6 Determinants of the primary surplus of municipalities (sustainability of municipal budgetary

policies)

Est. 1

Coefficient

(t-statistic)

Est. 2

Coefficient

(t-statistic)

Est. 3

Coefficient

(t-statistic)

Est. 4

Coefficient

(t-statistic)

Est. 5

Coefficient

(t-statistic)

Est. 6

Coefficient

(t-statistic)

Constant 4.572 -23.122 -22.166 -18.847 -30.771 -46.975

(267.555***) (-7.704***) (-7.362***) (-2.458**) (-4.072***) (-6.196***)

Dit-1 0.018 0.017 0.016 0.027 0.029 0.028

(7.158***) (6.595***) (6.488***) (9.385***) (9.852***) (9.844***)

Popit 8.546 8.305 2.216 1.698 1.615

(11.141***) (10.786***) (2.682***) (2.090**) (1.983**)

Popit2 -0.640 -0.624 -0.145 -0.100 -0.090

(-13.158***) (-12.761***) (-2.705***) (-1.902*) (-1.703*)

URit -1.301 -4.738 -3.429 -2.297

(-3.595***) (-11.141***) (-7.978***) (-5.295***)

GDPit 4.476 6.603 9.649

(3.154***) (4.724***) (6.877***)

GDPit2 -0.294 -0.377 -0.523

(-4.14***) (-5.387***) (-7.451***)

IRit 0.051 0.074

(14.347***) (19.141***)

APPit 0.658

(15.205***)

AR(1) 0.252 0.242 0.243 0.214 0.207 0.202

(53.379***) (51.157***) (51.337***) (46.525***) (44.437***) (43.48***)

Adj. R2 0.444 0.443 0.443 0.415 0.420 0.421

S.E. of regression 2.541 2.523 2.520 2.366 2.366 2.360

F-stat. 14.550*** 14.505*** 14.496*** 13.047*** 13.292*** 13.303***

DW stat. 1.925 1.923 1.924 1.916 1.924 1.929

n 40,052 40,052 40,052 40,052 40,052 40,052

Period 1992–2010 1992–2010 1992–2010 1992–2010 1992–2010 1992–2010

Cross-sections 2,356 2,356 2,356 2,356 2,356 2,356

Estimation: Panel EGLS (cross-section weights), including cross-section (fixed) effects (constants) not displayed in the

table

*** p \ 0.01, ** p \ 0.05, * p \ 0.1

Source authors’ own calculations, 2013

Empirica

123

In addition, Est. 3 accounts for potentially important local fiscal policies to

reduce the unemployment rate. As has been stressed in earlier papers on Austrian

fiscal policies, public expenditure and public debt is partially influenced by

reactions to the unemployment rate (discretionary fiscal policies) in the short run.

Higher unemployment rates in the labor market district where the municipality is

situated also drives down the primary surplus. We thus find some empirical

indications of the influence of active fiscal policies trying to reduce or mitigate

unemployment.

In order to test for the dependence of the primary surplus on economic growth, a

(quadratic) regional GDP term is added to the equation. As Est. 4 shows, this term is

significant and thus indicates that the primary surplus of municipalities—ceteris

paribus—increases with a higher regional GDP. However, the increase declines

with higher GDP levels.

Est. 5 of Table 6 shows that decision-makers of municipalities also seem to react

sensitively to the interest rate. As there is no consistent time series of the interest

rate of municipal bonds available, we had to compute a time series of the interest

rate of municipal debt by dividing the level of outstanding debt (Dit) by total interest

payments of municipality i, thus receiving an effective interest rate in year t. This,

however, assumes that interest payments vary to a certain degree. However, this

interest rate might not fully consider the financial situation of single municipalities

which might be quite different, thus potentially leading to different levels of risks

and specific municipal interest rates.

As expected, higher interest rates go hand in hand with an increased primary

surplus owing to higher interest payments for local debt with flexible interest rates,

as well as to precautionary fiscal policies against excessive expenditure. Further-

more, with increasing interest payments, the primary surplus within which interest

payments are accounted for is higher by definition than for lower interest rates.

Thus, some of the positive effects of the interest rate might be due to the

computation of the primary surplus. This result questions the arguably causal

relations between some of the explanatory variables and the dependent variable in

this concept of fiscal sustainability which might not be overcome with this

methodological approach.

Finally, we tested for the importance of theories of a political economy by

including a variable denoting the conservative Austrian People’s Party’s share of

votes in municipal elections. It may be hypothesized that conservative governments

may in general be more prone to lower public debt. Compared to the base line, the

primary surplus seems to increase with the share of conservative votes. The share of

votes for the conservative party is, however, negatively correlated with the size of

the municipality. With more residents in municipalities, the share of social

democrats increases. Many larger municipalities, especially cities with resident

numbers above 10,000, are ruled by a social democratic city government. These

municipalities also have stronger economic potentials leading to a higher primary

surplus. It is, however, noteworthy that the coefficient for the conservative party’s

share of votes is significantly smaller than that for the social democrats (this

estimation results is not displayed in detail in Table 6). It thus seems that some

Empirica

123

theories of political economy do not exhibit a major explanatory power in the

analysis of budgetary policies of Austrian municipalities.

The size of the reaction of the primary surplus of municipalities to increases in

municipal debt in the previous period in the range of 2.8–2.9 % seems to be broadly

sufficient to lead to stationary debt levels. However, with changes in the interest rate

or probable other influences on the primary surplus, the extent of fiscal policy

reactions might certainly change over time (cf. Lukkezen and Rojas-Romagosa

2012; Ghosh et al. 2011). Therefore, while our estimation results suggest sustainable

municipal policies in the past, future municipal policy reactions might be

substantially different.

In order to test whether local fiscal (budgetary) policies vary between the eight

provinces of Austria6 we split the sample into sub-samples comprised of

municipalities in the single states. Table 7 presents the results for the estimated

equations based on the full model as described in Est. 6 (Table 6). The first major

result of the different estimations (Est. 7–14 in Table 7) is that the coefficients for

the lagged debt variable (Dit-1) broadly lie in the same order of magnitude between

0.02 and 0.06. However, closer inspection indicates the existence of statistically

different coefficient sizes for some of the federal states. By means of a Wald

coefficient diagnosis test, we explored whether coefficients are statistically different

from the (average) coefficient for the whole sample. For instance, municipalities in

the federal state of Tyrol exhibit a coefficient of 0.064 which is significantly

different from the overall coefficient for all Austrian municipalities of 0.028 (cf. Est.

6) at the p \ 0.05 level of significance (F-statistic 5.786). On the other hand,

municipalities in Styria exhibit a below-average coefficient for the lagged debt

variable (p \ 0.01; F-statistic 11.146).

Municipalities located in the federal states of Burgenland, Carinthia, Upper

Austria and Vorarlberg did not react differently than the average while municipal-

ities in Lower Austria and Styria indicated a below-average reaction of the primary

surplus to public debt.

Table 7 also indicates that the results for the explanatory variables are mixed

with respect to the stability of the coefficients. In most federal states, higher

unemployment rates lead to a reduction of the primary surplus, while higher interest

rates were correlated to a higher primary surplus in all federal provinces. On the one

hand, it may be argued that municipalities would not be much different from each

other since the federal states rather have similar budgetary frameworks for the

budgetary processes. On the other hand, it is though interesting to consider the

different size of the coefficients for the main variables pointing not only to a diverse

economic picture but rather to differences in the stringency of rules and regulations.

As discussed above, different regulatory frameworks are implemented.

Finally, we also tested the explanatory power of different population classes. It

has been put forward in the literature that economic rules for the ‘‘optimal size’’ of a

community, for instance, in terms of costs of the provision of local/regional

6 As discussed above, Austria has nine federal states. However, since the city of Vienna is both a

municipality as well a federal state by its own, Vienna is not considered here owing to the large

distortionary effect of the inclusion of Vienna on the results.

Empirica

123

Ta

ble

7S

ust

ain

abil

ity

of

mu

nic

ipal

bu

dget

ary

po

lici

es:

dif

fere

nce

sac

ross

Au

stri

anfe

der

alst

ates

Est

.7

Est

.8

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.9

Est

.1

0E

st.

11

Est

.1

2E

st.

13

Est

.1

4

Fed

eral

stat

e

Burg

enla

nd

Car

inth

iaL

ow

erA

ust

ria

Up

per

Au

stri

a

Sal

zbu

rgS

tyri

aT

yro

lV

ora

rlb

erg

Coef

fici

ent

(t-s

tati

stic

)

Coef

fici

ent

(t-s

tati

stic

)

Coef

fici

ent

(t-s

tati

stic

)

Coef

fici

ent

(t-s

tati

stic

)

Co

effi

cien

t

(t-s

tati

stic

)

Coef

fici

ent

(t-s

tati

stic

)

Coef

fici

ent

(t-s

tati

stic

)

Coef

fici

ent

(t-s

tati

stic

)

Con

stan

t-

19

1.9

62

-2

05

.06

2-

29

.79

9-

38

.22

11

43

.45

3-

13

8.5

41

42

9.2

16

-6

1.5

19

(-5

.167

**

*)

(-1

.604

)(-

2.0

39

**

)(-

2.1

82

**

)(3

.95

3*

**

)(-

4.7

49

**

*)

(6.4

01

**

*)

(-0

.264

)

Dit

-1

0.0

35

0.0

59

0.1

81

0.0

35

0.0

45

0.0

13

0.0

64

0.0

34

(4.0

52

**

*)

(1.9

46*

)(1

5.2

64

**

*)

(4.2

79*

**

)(4

.94

7*

**

)(2

.98

8*

**

)(4

.25

8*

**)

(0.8

13

)

Po

pit

-2

.278

43

.67

4.7

99

22

.42

83

.315

4.0

96

-4

.917

-3

.16

(-0

.990

)(2

.54

4*

*)

(3.5

22

**

*)

(6.9

19*

**

)(1

.60

1)

(1.4

76)

(-2

.594

**

*)

(-0

.626

)

Po

pit2

0.1

41

-2

.50

1-

0.3

1-

1.3

97

-0

.227

-0

.241

0.3

70

.33

(0.8

78

)(-

2.2

52

**

)(-

3.5

62

**

*)

(-6

.879

**

*)

(-1

.69

9*

)(-

1.3

05

)(2

.97

3*

**)

(1.0

6)

UR

it-

2.3

51

-4

1.0

17

-2

.85

-1

3.9

23

-5

.954

1.0

4-

2.4

03

-4

.239

(-2

.177

**

)(-

8.8

1*

**

)(-

3.7

18

**

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(-1

2.9

4*

**

)(-

4.0

05

**

*)

(0.8

37)

(-1

.495

)(-

1.5

11

)

GD

Pit

42

.36

49

.006

3.2

36

-9

.01

1-

28

.59

26

.55

6-

77

.62

31

5.8

07

(5.7

72

**

*)

(0.3

65)

(1.2

67

)(-

3.1

64

**

*)

(-4

.08

3*

**)

(4.5

15*

**

)(-

5.9

76

**

*)

(0.3

50

)

GD

Pit2

-2

.179

-0

.65

4-

0.1

73

0.4

34

1.3

61

-1

.404

3.6

8-

0.8

72

(-5

.790

**

*)

(-0

.526

)(-

1.3

63

)(3

.06

2*

**

)(4

.00

9*

**

)(-

4.7

01

**

*)

(5.8

33

**

*)

(-0

.397

)

IRit

0.0

34

-0

.11

40

.064

0.1

20

.024

0.1

23

0.0

34

0.1

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(3.4

27

**

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(-2

.78*

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)(1

0.1

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(12

.516

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(2.2

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(10

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(2.7

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(4.4

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AP

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1.2

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0.7

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(7.4

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(1.2

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(7.3

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(9.6

91*

**

)(1

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(7.6

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)(2

.19

8*

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(3.5

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**

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AR

(1)

0.2

41

0.2

85

0.1

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0.1

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0.1

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0.1

95

(13

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3*

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(13

.884

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(20

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)(2

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adj.

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0.4

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0.3

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92

Empirica

123

Ta

ble

7co

nti

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ed

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11

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F-s

tat.

12

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DW

stat

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Empirica

123

infrastructure might exist. We therefore test whether the estimated coefficients vary

between groups of municipalities of different size. Detailed results are not presented

here owing to space restrictions; however, the results indicate that there are some

differences between the population classes. Larger cities above 10,000 inhabitants

seem to have slightly smaller coefficients of the (lagged) debt variable than smaller

municipalities. This comparatively smaller reaction might be due to the larger

possibility of cities to borrow (soft budget constraint) and a broader basis of

revenues which might be used to fund public activities. It thus seems that smaller

municipalities up to 5,000 inhabitants are more budget-constrained and limited in

their borrowing capacities. On the other hand, municipalities with a population in

the range of 5,000 to 20,000 residents exhibit slightly larger coefficients of the

(lagged) debt variable.

5 Hidden public debt: privatization, outsourcing, off-budget and implicit debt

The analysis so far has exhibited two major results. First, Austrian municipalities

‘public debt is stationary, with significant and sufficient reaction of policy makers

driving up the primary surplus if debt increases in order to pay back liabilities in the

long run.7 Second, we also saw that there are many determinants of the

municipalities’ primary surplus such the unemployment rate, economic growth,

population size, and the costs of debt in terms of the interest rate level.

However, as has been mentioned before in Sect. 3, the reported municipal debt

per capita only mirrors public debt present in the ‘‘official’’ budgets. There might be

reasons to assume that ‘‘real’’ debt is much higher than the presentations. Two main

sources of additional debt should thus be mentioned. First, municipalities have

increasingly outsourced infrastructure companies, for instance, in the fields of waste

water management, public transport, or waste treatment and disposal. Municipalities

have established their own companies with legal frameworks of private companies,

such as limited liability companies. These companies, owned by municipalities,

have acquired substantial portfolios of infrastructures and, in addition, of formerly

municipal debt. European Union rules of public debt explicitly state that such

liabilities have to be reported as being ‘‘public debt’’ if (municipal) companies earn

less than 50 % of their total costs by their own revenues such as fees, charges, or

other market revenues.

Austrian Statistics offered new insights to hidden (off-budget) municipal debt

which may add EUR 1.8–3.3 bn to the municipal debt level (Austrian Statistics

2012).8 On the other hand, it is estimated that off-budget public debt of

municipalities may even amount to about 60–85 % of reported municipal debt

which would add about EUR 7 to 10bn to total municipal debt (Hauth and

Grossmann 2012). However, it is important to consider that debt for infrastructure

7 Austrian municipalities have more than 80 % of their debt in long-term loans, and about 18 % of short-

term liabilities; the rest consists of long-term bonds (Grossmann and Hauth 2009).8 Only recently, agreements on the European Union level have addressed this problem which may pose

additional fiscal stress on municipalities.

Empirica

123

investments which usually last for more than one generation make economic and

distributional sense as several generations utilize infrastructure and therefore also

contribute to the financing of these basic endowments for consumption as well as

production. In addition, not all municipal debt may also be counted as ‘‘public debt’’

if infrastructure is financed by charges and fees.

Second, municipalities above a certain population threshold, mainly statutory

towns, have implicit (implied) liabilities in the form of future pension commitments

for the city’s civil servants and public officers. While this problem of implicit

liabilities is prevalent in all public budgets, it is certainly of special interests to

towns due to the potentially high relative burden of future pension payments.

6 Discussion, summary and conclusions for municipal debt management

Public debt of Austrian municipalities increased from about EUR 1,100 per capita to

roughly EUR 1,600 per capita (constant 2005 prices). Notwithstanding short-term

fluctuations, the main increases took place from 1992 until about 1995. In this year

Austria joined the European Union and consequently had to reduce public deficits

significantly. In fact, since the introduction of the common Euro currency, public

debt levels remained constant or even decreased slightly. Only recently, the

financial crisis has lead to high fiscal stress on budgetary policies.

However, given the rather stable municipal debt levels in the period from the

mid-1990s to 2008/2010, we find that stationarity tests indicate that debt level

remained stable with a clear mean-reverting tendency in our econometric panel

analysis. This result is interesting by itself since it underlines the often-heard claim

that the current fiscal stress on Austrian public budgets is clearly a result of the

international economic and financial crisis rather than a consequence of long-term

unsustainable policies at least at the local level. However, this crisis has also

exposed that debt levels have been too high (even if they were stationary), and that

the discretionary room for stabilization policies (e.g. combating rising unemploy-

ment rates, fiscal stability packages for the financial sector) is diminishing fast.

Testing sustainability of municipal budgetary policies along an adapted version

of Bohn’s (1998) test corroborates the assessment of municipal debt policies as

being sustainable, largely indicated by the significant and sufficient reaction of the

primary surplus to debt increases in the previous year. This significant reaction

shows that municipal policy makers have been aware of the municipal debt

limitations which are in place in each federal state of Austria. As the descriptive

analysis shows, however, their room for maneuver is limited since major

expenditure and revenue categories cannot be influenced in the short term, and

may also not have a short-term impact on the municipal primary surplus. Especially

intergovernmental grants to be paid to the state government constitute the largest

expenditure category which cannot be influenced by municipal decision makers.

Municipal fiscal sustainability has thus been achieved primarily by reducing

public investment in local infrastructure. The reduction of infrastructure invest-

ments is highly problematic since municipalities provide vital local infrastructure

such as schools, child care facilities, but also water, sewage and waste management

Empirica

123

system. A reduction or lack of reliable infrastructure jeopardizes local and regional

development especially in peripheral regions. Additional fiscal stress is posed on

municipal budget by improved standards, e.g. for child care, fundamental schools,

health facilities, or senior homes. While it is certainly positive to raise quality

standards, e.g. by reducing the number of students per class, costs for municipalities

rise consequently without federal policies to equally improve the financial base of

municipalities.

The econometric estimations also indicate that the reaction function (i.e. the size

of coefficients) varies between states, and between population classes. Some

differences may be due to different regulatory frameworks in the federal provinces

of Austria. As Sect. 3 has emphasized, regulatory frameworks for local borrowing

and supervision of municipal budgetary policies are different between Austrian

states.

Our analysis has also highlighted some aspects in municipal economic policies.

As may be expected, municipal decision makers try to react to increasing

unemployment, and to lower economic growth. Both factors influence the primary

surplus of municipalities by smaller revenue, and by larger discretionary

expenditure.

In addition to our econometric tests, we show that off-budget debt may aggravate

the current debt crisis of municipalities, and assess the sustainability of public debt

in light of sub-sovereign debt. However, there are currently no reliable statistic

available that quantify off-budget debt, nor is data available on communal liabilities

(guarantees), for instance, for communal infrastructure and enterprises.

All in all, our study shows that limits to debt and borrowing which have only

recently been implemented on the European level with respect to central

governments’ debt, may function under specific circumstances at the level of sub-

national governments. With respect to municipalities, one major aspect is certainly

that municipalities were always credit-constrained, and that they do not have much

leeway for borrowing. Municipal fiscal policies are closely and strictly monitored by

regional supervising authorities (mainly the state governments). State governments

even may send government commissioners to municipalities if excessive debt levels

occur. In such cases, all expenditures have to be reviewed and confirmed by the

commissioner. Nevertheless, it is questionable which European or international

institution may have the power to review and monitor budgetary policies of national

governments in this strict sense. In addition, when compared to national

governments, municipalities only have very limited autonomy in levying taxes

(or designing new ones).

One major conclusion based on our empirical results lies in building and

strengthening the institutional capacity of municipal decision makers to cope with

the manifold and complicated tasks of sustainable fiscal policies. However,

improvements of management skills, and fiscal policy knowledge of municipal

decision makers, may not solve municipal fiscal problems regarding achieving

sustainable policies. By now, municipalities had to react by reducing local

investments in infrastructure. A possible solution may lie in the extension of the

fiscal autonomy of municipalities in levying their own taxes. However, the analysis

Empirica

123

of the concrete effects of increasing fiscal autonomy on the sustainability of

municipal budgetary policies has to be left to future research.

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