Local Government Budgets Stressed by Population Decline? – An Analysis of Residual Costs for the Local Communities of Styria in Austria

Abstract

This article looks into the effects of population decline on local public expenditure. It starts with a theoretical explanation of so-called residual costs, i.e. cost curves of shrinking communities lying above those of growing. Data at the community level of the state Styria (Austria) on expenditure categories which have natural monopoly characteristics from 1997-2007 provides empirical support that expenditure per capita grew significantly stronger in shrinking communities than in growing communities. These results provide evidence that at least some of the public expenditures cannot be adjusted to the population decline in the medium term. Keywords: residual costs • local public expenditure • population decline • infrastructure • Austria • fiscal federalism