The Political Effects of Local Fiscal Shocks

Abstract

Local governments are increasingly facing budget shortfalls, which can alter policy choices and may ultimately affect constituents' attitudes and behavior. This dissertation examines the political repercussions of positive and negative shocks to local government finances. In the first paper, I analyze how local governments respond to budget shortfalls during economic crises. In doing so, I study German local governments before and during the Great Recession. I compile a fourteen-year panel of 2,193 German municipalities, focusing on local fiscal policy choices, namely local business taxes. I find that greater exposure to the crisis, as measured by local budget declines, has a negative effect on local business tax rates. In the second paper, I extend this analysis by assessing whether government responses to the crisis are structured by the local informational environment. More specifically, I examine the interplay between government policy choices and an institution that is viewed as essential for democracy: the local press. Based on the results of the first paper, I demonstrate that relative business tax cuts are largest in areas with a greater local media presence. Using survey evidence, I propose that a greater local media presence exposes constituents to more reporting on the negative repercussions of the crisis, increasing popular demands for responses that benefit the struggling local economy. The third paper - based on co-authored work with Anselm Hager - shifts the focus from negative to positive budgetary shocks. We analyze whether increases in government spending on public goods affect citizens' vote choice. In doing so, we draw on a natural experiment, which created exogenous variation in government spending. A discontinuity in the 2011 German census meant that some municipalities saw a significant, unforeseen budget increase. Using a regression discontinuity design, we show that the increase in budgets and subsequent spending on public goods benefited left-leaning parties.