Does Direct Democracy Reduce Public Debt? Evidence from Swiss Municipalities.

Although some countries have managed to obtain balanced budgets or even budget surpluses in recent times, public debts of many OECD countries remain at high levels. Since structural reforms of public spending have only infrequently taken place in most countries, fiscal pressure will increase again in the future due to society's ageing and the accompanying increases in social transfer spending. Constitutional restrictions on debt levels and legal rules of the budgetary process, such as a strong role of the minister of finance, are supposed to be helping against the debt bias inherent in political decision-making procedures. In addition to such top down budgetary procedures, this paper investigates the impact of referendum approval of budget deficits by the voters on the level of public debt in a cross section of the 134 largest Swiss municipalities in 1990. Copyright 2001 by Kluwer Academic Publishers