Political factors and municipalities debt: An empirical assessment in Portugal

Abstract

This paper explores the relationship between municipalities debt, measured by debt per capita and different political factors, for the 308 Portuguese municipalities, from 2014 to 2018. This study adds to the scarce prior research about Portuguese municipalities’ debt and constitutes an original approach in the sense that these issues will be explored with more recent data, under the Local Finance Law (LFL) of 2013, implemented after the Local Administration Reform. We do not find evidence of an electoral cycle effect nor an ideological effect on the level of debt per capita. Only the coincidence of the political parties between the Local Executive and Central Government appeared to be relevant in medium/large municipalities. New insights about the relationship between political factors and debt are pertinent, mostly when Portugal started a decentralization process, with more competencies being assigned to local governments and more financial resources being requested, which could lead to an increase in the debt levels.