The effects of fiscal autonomy on the size of public sector and the strength of political budget cycles in local expenditure

We analyze the effects of political business cycles and fiscal autonomy on the expenditure categories of Polish municipalities. Using System GMM technique, we find convincing evidence for strong political business cycles in almost all expenditure categories, and in particular for the categories of expenditure relevant for electoral success such as infrastructure and social expenditure. Transfers to municipalities from the central government accentuate the strength of the electoral cycles, but surprisingly are associated with lower expenditure levels outside of the election periods. The latter results are the main finding: fiscal autonomy although not necessarily reducing the levels of local expenditure, does reduce the level of political manipulation of the budgets.