Analysing Italian Local Authorities' Expenditure Behaviour: A Tentative Interpretation

Abstract

After the reform of local government organisation and finance following Act 142/1990, Reforming local autonomy, Italian councils can exercise considerably more discretion in setting their expenditure and taxation levels; in this paper a model in the microeconomic tradition is developed to predict the likely changes in these councils' behaviour. The model is based on the assumption that local governments behave as if they were maximising a nested Stone—Geary utility function; at the first stage of the utility-maximisation process, they set up the overall level of taxation, and at the second level they decide how to allocate expenditure among the different services. The results suggest that in the first years after the reform a utility-based incremental budgeting model could explain the determination of expenditure and its composition. Although the model has strong microeconomic foundations, the interpretation of the results may need to be tentative because the data used in the estimation procedure are for a transition year from the old to the new system. The results of the estimated econometric model were then used to predict the likely changes in expenditure which will be brought about by the introduction to the system of a locally managed property tax.