Determinants of Debt for Local Governments in Europe –  Panel Data Research

Pawel Galinski

doi:10.23762/FSO_VOL11_NO2_3

Published : 2023-06-30

Vol. 11 No. 2 (2023)

Determinants of Debt for Local Governments in Europe – Panel Data Research

Pawel Galinski

https://orcid.org/0000-0002-9407-4515

DOI: https://doi.org/10.23762/FSO_VOL11_NO2_3

Abstract

In local government, debt is a key factor determining long-term solvency, stability and the level of fiscal strain. The indebtedness of this sector may affect the quality of life and private businesses alike. Thus, the aim of the article is to examine financial, economic and demographic determinants of local government debt in Europe, as well as to identify the associations between the debt burden and certain spending categories. The study concerns 27 European countries in the period 2007–2020. Therefore, panel data regression models were estimated, namely the fixed effects model and the random effects model. The survey showed that in the context of local government, the growth in debt per capita is positively affected by the decentralisation of expenditure and investment activity. However, an increase in the share of expenditure on housing and economic affairs in the budget decreases the debt burden, whereas an increase in the share of expenditure on education, health and social protection positively stimulates the level of indebtedness. In addition, local authorities should promote the growth of the working age population to mitigate the effects of urbanisation on the growth of debt and take advantage of periods of low interest rates to restructure the debt portfolio.

Keywords:

local government, Europe, debt, panel data models, determinants

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Galinski, P. (2023). Determinants of Debt for Local Governments in Europe – Panel Data Research. Forum Scientiae Oeconomia, 11(2), 69–86. https://doi.org/10.23762/FSO_VOL11_NO2_3

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