The Effects of Grants Cuts on Public DeficitDoes Incumbent's Ideology Matter?

Resumen

Grants cuts may be compensated by increases in own revenues in order to maintain expenditure levels. If so, asymmetries in the effects of grants on the latter will be found. Using a dataset from Galician municipalities, the way of financing those asymmetries is analyzed. Debt is the main instrument used by local governments to smooth grants cuts, with taxes playing a marginal role. Departing from this result, relationships between deficit and ideology are studied. While increases in deficit due to grants cut are only statistically significant in the case of leftist incumbents, there are other causal mechanisms relating ideology and propensity to deficit. Differences between leftist and non-leftist incumbents are also relevant when looking at the effects of the electoral cycle, the use given to grants, or the propensity to tax households¿ income. As those differences play in opposite directions, net result is that relationship between ideology and deficit size is not statistically significant at usual levels. Those results claim for a careful analysis of the role played by politics in fiscal choices. In particular, the use of interactions between political variables and usual regressors in fiscal equations should be exploited in a higher extent to understand the net effect of the former on the latter.