An empirical investigation of the influence of municipal fiscal policy on firm growth

Abstract

Over the last decades, many countries experienced a trend towards fiscal decentralisation, with the result that municipal governments have a largely increased degree of autonomy with respect to their fiscal policy. This shift has not been matched however with a change in the focus of the academic research on the economic effects of public finance, which is still predominantly conducted at the national and regional level. In this paper, we study the impact of municipal government taxation and spending on the growth rate of firms. We explore a panel dataset which combines detailed information from the financial accounts of Flemish municipalities with the financial reports of the firms located in those municipalities. Our analysis of data from close to 70,000 firms in 308 municipalities for the period 2004–2013 indicates that municipal fiscal policy has a statistically significant effect on firm added value growth and employment growth. No statistically significant effect was found on asset growth. Overall, the economic significance of municipal fiscal policy turns out to be small and is, for instance, not able to outweigh the effects of the recent financial crisis.