Public Debt in the Spanish Municipalities: Drivers and Policy Proposals

Abstract

The COVID-19 pandemic has exacerbated the local debt in Spanish municipalities with negative consequences on the macroeconomic financial stability at national and eurozone level. The main objective is to identify the causes of public debt per capita in four groups of Spanish municipalities according to size. It is based on a quantitative analysis based on correlational and causal-comparative approaches. It consists in the construction of panel quantile regressions (MMQ) and mean group (ME) estimators to explain public debt per capita in Spanish municipalities. Moreover, the Juodis test for causality analysis in panel data is applied. The research is constructed around various types of potential determinants related to economic factors (GDP per capita and unemployment rate), demographic factors (population under 15 and population over 65), and political factors (political party, ideology, and political strength). The results based on MMQR for the period 2011–2020 indicate common factors that reduce local debt (short-run economic growth), but also differences between clusters in what concerns factors that increase or decrease the debt. The Juodis et al. (2021) test shows that growth and unemployment are factors that influence the level of public debt in all groups of municipalities except one (5001–20,000 inhabitants) where political party affects debt. These empirical findings support policy proposals to reduce the local debt in Spanish municipalities. The main initiatives to reduce debt should be based on the promotion of economic growth and creation of new jobs, especially for young people.