Sustainability of local government debt: a case study of Austrian municipalities

Austrian municipalities face manifold challenges with respect the sustainability of their budgetary policies, especially concerning public (municipal) debt. On the one hand, municipalities are closely monitored and supervised by upper-level governments. Local borrowing is confined to pre-defined cases with respect to extraordinary expenditure. Both dimensions come close to constitute an at least soft debt limit (budget constraint) for municipalities. On the other hand, municipal discretion over expenditure and revenue is limited. In the current paper, we test whether municipalities' budgetary policies were sustainable by means of an adapted version of Bohn's (Q J Econ 113:949-963, 1998) sustainability test. We find that municipal debt limits were quite effective and resulted in stationary debt levels, and in significant and sufficient reactions of the municipal primary surplus to increasing public debt. However, in order to achieve such sustainable policies, municipalities have widely cut investments in local infrastructure. From a long-term perspective, such development is problematic with respect to the quality of available infrastructure.