The impact of fiscal rules on the financial management of municipalities : a comparative analysis of the Czech Republic and Slovakia

This chapter explores the impact of fiscal rules on the indebtedness of municipalities in the Czech Republic and Slovakia from a comparative perspective. Our analysis focuses on the content of municipal fiscal rules, their impact on aggregate levels of local government debt in both countries and the financial situations of individual local governments with excessive debt. The findings indicate that municipal fiscal rules in Slovakia are slightly more comprehensive than those in the Czech Republic; however, the way they regulate aggregate level of municipal debt is very similar. Despite very similar starting points, the number of municipalities with excessive debt levels is significantly higher in the Czech Republic than in Slovakia. Though both countries face the problem that excessive borrowing is legally prohibited, the practice does still take place in a number of local governments. Excessive borrowing is exclusively found in small municipalities with a very limited chance to escape from the debt trap, as the regulatory regime of both countries does not lend itself to bailout or bankruptcy.