Determinants of Portuguese local governments’ indebtedness

Using an extensive dataset covering all Portuguese local governments (308), this paper analyzes the determinants of municipal deficits and debt. The results clearly indicate the existence of a political budget cycle, but there is no evidence that fiscal policy is used strategically to condition the decisions of subsequent governments. Furthermore, local governments that enjoy larger support in the town-hall and for which there is party similarity between the mayor and the prime-minister have larger budget balances. Finally, larger shares of investment and of interest payments in expenditures, and higher unemployment rates increase indebtedness, while higher private sector wages, more construction licenses, and greater percentages of the municipal area assigned to urban use are associated with lower indebtedness.