Financial Decisions, Intergovernmental Grants and Regulatory Instability: The Case of Italian Municipalities

Because of the global financial crisis, central states implemented a range of recovery plans, austerity measures and cutback strategies, which created significant challenges to local governments. This article examines the influence of (adverse) national adoptions in the fiscal regulatory framework on local revenues and expenditures. Building on economic theory, we evolve a set of hypotheses on local fiscal policies. To test these, we use panel regressions of more than 1000 Italian municipalities between 2008 and 2015. Italy is a particularly suitable case for this research, since the financial crisis strongly affected the country and the central government implemented multiple changes to the institutional framework, which created great instability for local governments. In general, Italian municipalities have shown a specific pattern of financial decision-making as a reaction to revenue grants, i.e. positive effects on current and capital expenditures and on own revenues. We also found that changes in the legal and financial framework influenced patterns for capital and personnel expenditures, suggesting that certain patterns of reaction are more contingent than other ones. Moreover, this article contributes to the understanding of regulatory instability on local level decision-making and shows that instability cancels the influence of some usual determinants.