Analysing financial risks of local governments to design sustainability policies for public services: An empirical study by the population size

Abstract

Academic researchers and international organisations have highlighted the need for a more extensive analysis of public finance in small and medium-sized local governments, in view of the high levels of borrowing observed, often aggravated by rural depopulation. The purpose of this paper is to identify financial risks by population size of local governments, to design sustainability policies for public services in small and medium municipalities. We consider the situation of 6,456 Spanish municipalities during the period 2009-2018 and find that certain demographic and socioeconomic factors influence the probability of loan default, in municipalities of all sizes. In smaller ones, the variables with most impact in this respect are socioeconomic, while among the demographic variables, female immigration and generational turnover are the most significant. In larger municipalities, the influence is more balanced between demographic and socioeconomic variables. Our results concludes that policies to reduce unemployment and the rate of generational turnover, as means of enhancing the financial viability of public services, should differ between small and large municipalities, especially as concerns employment promotion in the construction sector for persons aged 25-44 years. These employment promotion policies should pay special attention to female immigration, which is a risk factor for municipal default.