Standard Spending Needs of Italian Municipalities

Standard spending needs of municipalities, a crucial aspect of fiscal federalism, should be computed under some conditions: that municipalities have the same efficiency, that citizens have the same preferences, and, especially, that local governments are equal with regard to some «non structural» characteristics. The fitted values obtainable from the estimate of an expenditure function do not satisfy these conditions. Standard spending needs are better represented by conditional expected values, which are obtained by sterilizing differences in non structural determinants of municipality expenditures, like government grants. To compute spending needs we define two standard levels: an «average» standard and a «minimal» standard, which is defined as the minimum amount of resources that allows municipalities to provide a sufficient level of services. The method is applied to 2007 data of Italian municipalities.