Public finance

Fiscal rules, fiscal performance and tax competition among municipalities in Switzerland

Parchet, R., and Jametti, M. 2015-2018 - Swiss National Science Foundation (grants 159348)

Fiscal rules have been introduced at national or sub-national levels in many countries around the world with the aim of reducing public deficits and public debt, strengthening fiscal discipline and fostering economic performance. The recent financial and economic crises have put these fiscal rules (or the lack thereof) at the center of the policy debate. Switzerland, with its long history of political and fiscal decentralization, has been an ideal setting to study the effects of fiscal rules at the sub-national level. The focus of the existing literature has been so far the cantonal level. Studies of the effects of fiscal rules at the municipality level have been scarce and limited by the use of cross-sectional variation on a small sample of municipalities. Moreover, the existing literature abstracts from vertical interdependencies between municipality-level and canton-level fiscal rules. These vertical interdependencies can be crucial as the effects of institutions of one level of government could potentially be canceled by the lack thereof at another level.

The aim of this project is, first, to extend the existing literature and analyze the effect of fiscal rules at the municipality level on their fiscal performance. Several cantons have introduced in the last 15 years different balanced budget requirements for their municipalities, creating cross-sectional but also time variation to exploit empirically. A key aspect of this analysis will be to take into account vertical interdependencies between canton-level and municipality-level fiscal rules. The second aim of this project is to investigate how fiscal rules affect tax competition among local jurisdictions. Balanced budget rules plausibly create different incentives for local governments in their tax setting, which might therefore change their strategic interactions. One hypothesis is that, under more stringent rules, municipalities are less likely to pursue a tax-base preservation strategy by lowering their tax rate than to pursue an expenditure-preservation strategy by increasing their tax rate.