Political-Ideological Circumstances and Local Authorities’ Debt: Evidence from Portuguese Municipalities

Abstract

The objective of this research is to analyze whether the political-ideological situation of municipalities affects their debt level, considering evidence from Portugal for the period 2004-2013. A static panel data model is applied, incorporating factors such as political ideology, political-electoral cycle, governance format, coincidence of the political parties between Local Executive and Local Assembly and coincidence of the political parties between the Local Executive and Central Government. An additional variable to control the effects of the economic crisis between 2008 and 2010 is also considered. Based on the assumptions of the public choice theory, findings show a statistically significant relationship for the political-electoral cycle, allowing the conclusion that, given the evidence from Portuguese municipalities, debt increases in election years. Nevertheless, this is the only factor in the political-ideological circumstances that was found to be relevant in its effect on local authorities’ debt levels. It is also clear that the financial crisis in the period 2008-2010 likewise had a positive impact. The paper contributes to the strengthening of the debate on the association between municipalities’ political circumstances and debt, namely, in regards to strategic (electoral) debt cycles in local government.