Analyzing the causality between revenues and expenditures in Spanish municipalities and its policy implications

Abstract

This paper examines the causality between expenditure and revenues for Spanish municipalities after their division in four groups according to size given by number of inhabitants. The results based on Juodis, Karavias and Sarafidis test in the period 2011–2020 indicated that the bidirectional causality between revenues and expenditure is supported for three groups of municipalities (smaller than 5,001 inhabitants, from 5,001 to 20,000 people, from 20,001 to 50,000 inhabitants). The bidirectional causality in municipalities larger than 50,000 inhabitants is checked only for taxes and expenditure at 5% significance level. Large municipalities with more than half a million inhabitants could employ revenue-enhancing policies to overcome the budget deficit, while smaller municipalities promote fiscal synchronization and realize revenues and expenditures at the same time. The policy implications of results are discussed.