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Thematic Publication: Makro Risks - Indebtedness

The Financial Management of Local Governments in 2011 in Light of the Crowding-out effect of their debt service

Tamás Vasvári


Published in: Public Finance Quarterly 2013/3 (p. 307-333.)

Summary: In my previous research, I carried out an in-depth review of the financial management of local governments and the development of their indebtedness in the period between 2004 and 2010. I sought to put the object of my research – an area that has recently come into the focus of special attention – in a different perspective. As the first step of the present study, the concept of the deficit mechanism will be extended in order to identify the factors which influence local government deficit and the level of local government indebtedness. It can be concluded that while the budget deficit increases net debt, as an indirect consequence, it improves the budget balance owing to the funds raised to cover the related debt service. After this theoretical introduction, we will present the financial management of local governments between 2004 and 2010, followed by a separate analysis of the 2011 sector-level budget. We can conclude that the budget balance of local governments improved significantly in 2011, primarily as a result of the increase in operating and investment revenues. Local government expenditure on renovations—in line with the drop in the overall volume of investments—showed a decrease in 2011, mainly as a result of seasonal trends. The debt of local governments did not show a markedly decreasing tendency in 2011 despite the consolidation of the debt of county local governments as the revaluation effect arising from liabilities denominated in foreign currencies counterbalanced the potential decrease. In the light of the above, it can be stated that the debt service, which has been an increasing burden on the shoulder of local governments from 2012, requires greater financial capacity than local government budgets currently hold and will possibly lead to further reorganisation and/or consolidation measures at both the central and local levels of administration.

Keywords: local government, budget deficit, indebtedness, crowding-out effect, debt service

Journal of Economic Literature (JEL) kód: H60, H62, H70, H72, H74

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