Revenue Decentralization, Central Oversight and the Political Budget Cycle: Evidence from Israel

34 Pages Posted: 7 Aug 2015

See all articles by Sebastian Blesse

Sebastian Blesse

Deutsche Bundesbank - Research Department

Adi Brender

Bank of Israel - Research Department

Thushyanthan Baskaran

University of Goettingen (Göttingen)

Yaniv Reingewertz

University of Haifa - Department of Political Science

Multiple version iconThere are 2 versions of this paper

Date Written: July 2015

Abstract

This paper examines whether revenue decentralization and direct external financial supervision affect the incidence and strength of political budget cycles, using a panel of Israeli municipalities during the period 1999-2009. We find that high dependence on central government transfers — as reflected in a low share of locally raised revenues in the municipality’s budget — exacerbates political budget cycles, while tight monitoring — exercised through central government appointment of external accountants to debt accumulating municipalities — eliminates them. These results suggest that political budget cycles can result from fiscal institutions that create soft budget constraints: that is, where incumbents and rational voters can expect that the costs of preelection expansions will be partly covered later by the central government.

Keywords: Political budget cycles; soft budget constraint; local governments; decentralization

JEL Classification: D72, H72, H74, E62

Suggested Citation

Blesse, Sebastian and Brender, Adi and Baskaran, Thushyanthan and Reingewertz, Yaniv, Revenue Decentralization, Central Oversight and the Political Budget Cycle: Evidence from Israel (July 2015). ZEW - Centre for European Economic Research Discussion Paper No. 15-046, Available at SSRN: https://ssrn.com/abstract=2640276 or http://dx.doi.org/10.2139/ssrn.2640276

Sebastian Blesse (Contact Author)

Deutsche Bundesbank - Research Department ( email )

PO Box 10 06 02
D60006 Frankfurt
Germany

Adi Brender

Bank of Israel - Research Department ( email )

PO Box 780
Jerusalem 91007
Israel
+972 2 655 2618 (Phone)
+972 2 655 2657 (Fax)

Thushyanthan Baskaran

University of Goettingen (Göttingen) ( email )

Platz der Gottinger Sieben 3
Gottingen, D-37073
Germany

Yaniv Reingewertz

University of Haifa - Department of Political Science ( email )

Haifa
Israel

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