148
Abstract
The consolidation perimeter of the public
sector is the most important line between the
micro and macro systems of government ac-
counting. This paper focuses on the public sector
boundary and assesses the potential impact on
key reported figures – such as the ‘Maastricht’
deficit and debt ratios – that would result from
moving public corporations inside the perimeter
of the consolidated general government sector,
public corporations that currently lie outside the
general government sector. After examining 90
Spanish local governments with populations of
over 50,000 during the 2010-2012 period, our
results show that including public corporations
within the general government sector perimeter
leads to substantial differences in deficit and
debt ratios, and that these differences signifi-
cantly increase the number of municipalities in
violation of fiscal limits imposed by the govern-
ment. We also find that municipalities’ pre- and
post-consolidation debt ratios are significantly
different depending on the ruling party’s political
ideology.
Keywords: national accounting, public ac-
counting, ESA 2010, consolidation perimeter,
debt, deficit.
TO WHAT EXTENT SHOULD PUBLIC
CORPORATIONS BE CONSOLIDATED?
CONSIDERING THE EFFECTS
ON PUBLIC DEFICIT AND DEBT
IN SPANISH MUNICIPALITIES*1
Marta de VICENTE LAMA
Magdalena CORDOBÉS MADUEÑO
Mercedes TORRES JIMÉNEZ
Marta de VICENTE LAMA (Corresponding author)
Lecturer, Department of Financial Economics and Accounting,
Loyola Andalucía University, Córdoba, Spain
Tel.: 0034-957-222.214
E-mail: mvicente@uloyola.es
Magdalena CORDOBÉS MADUEÑO
Senior Lecturer, Department of Financial Economics and
Accounting, Loyola Andalucía University, Córdoba, Spain
E-mail: cordobes@uloyola.es
Mercedes TORRES JIMÉNEZ
Senior Lecturer, Department of Quantitative Methods, Loyola
Andalucía University, Córdoba, Spain
E-mail: mtorres@uloyola.es
* Acknowledge. We gratefully acknowledge comments and
suggestions from two anonymous referees, Ana Gisbert and
seminar participants at the XI Workshop on Empirical Re-
search in Financial Accounting. We acknowledge financial
contribution from Junta de Andalucía (SEJ-425).
Transylvanian Review
of Administrative Sciences,
No. 52 E/2017, pp. 148-164
DOI:10.24193/tras.52E.9
Published First Online: 2017/10/31
149
1. Introduction
The scope of potential research on consolidation practices has been extended by
ongoing debates regarding the convergence and harmonization among public ac-
counting systems in EU Member States and the convergence of micro and macro sys-
tems of government accounting information. Achieving these convergences is under-
stood as a prerequisite to improving the comparability of accounting and statistical
information between states, and to enhancing governmental decision-making (Dab-
bicco, 2015; Heald and Georgiou, 2000). In this context, the consolidation perimeter of
the public sector is one of the most important areas of divergence between the micro
and macro systems of government accounting (Dasí et al., 2016; Jorge et al., 2014; Le-
quiller, 2014).
In the EU, public deficit and debt figures are assessed based on the national ac-
counting system (the macro system), and both figures depend fundamentally on the
criteria used to define the consolidation perimeter of the public sector. EU Member
States prepare national accounts in accordance with the European System of Nation-
al and Regional Accounts (ESA), which provides guidance on sector boundaries be-
tween the general government sector (GGS), the public financial corporations sector
(FS) and the public non-financial corporations sector (NFS). A precise delineation of
the GGS is critical in the EU, as it is the basis for determining government deficit and
debt ratios that are key figures in monitoring Member States’ compliance with the
Maastricht convergence criteria.
Since 2014, the conceptual framework for elaborating national accounts has been
the ESA 2010 (European Parliament and the Council, 2013), under which the GGS
consolidates entities that are controlled by a government and are non-market orient-
ed (i.e., the price at which they sell their products or services differs markedly from
market-oriented entities). In several European countries, most public services at the
local level have become involved in a series of externalization-oriented activities, and
there has been a drive to create separate corporations to provide various municipal
services (Grossi and Reichard, 2008). The market/non-market output analysis for clas-
sifying these public corporations in the GGS or in the NFS is operationalized by em-
ploying the concept of economically significant prices, which has been shown to be
sensitive to interpretation (Dabbicco, 2015). Therefore, the boundary of the GGS and,
in particular, the issue of which public corporations are inside or outside the GGS is
an important issue that should be clearly explained and thoroughly researched be-
cause it directly affects government deficit and debt figures.
Spain is one of the most decentralized European countries and, in recent years, the
number of public corporations owned by municipalities has increased significantly
more than in other countries. This increase has been particularly important since the
application in 2001 of the first Law of Budgetary Stability (Law no. 18/2001), which
prohibits all levels of government (central, regional and local) from running non-fi-
nancial deficits. Additionally, the Spanish government established local government
150
debt limits restricting total municipal debt in the Local Tax Authorities Act (Royal
Decree-Law no. 2/2004). At the local level, a 2012 report by the Spanish General In-
tervention Board of the State Administration (IGAE, 2012) revealed that local govern-
ments hold shares in nearly 1,300 decentralized corporations. Indeed, there are nearly
1,100 corporations whose accounts are not consolidated with those of their parent
municipality when computing non-financial deficits and debt levels.
Therefore, the Spanish context seems to be an ideal setting in which to simulate
the effects on non-financial deficit/surplus and debt ratios that would result from in-
cluding within the perimeter of GGS consolidation those public corporations that cur-
rently lie outside this perimeter. Second, this study analyzes whether including these
companies within the perimeter of GGS consolidation leads to a significant increase
in the number of municipalities in violation of deficit and debt requirements, which
is particularly important because missing the deficit or the debt limits may have sig-
nificant legal consequences for municipalities. The penalty for non-compliance with
the targets is that the municipality will be under scrutiny and will have to prepare a
‘rebalancing plan’ to meet the target within one year. Moreover, if non-compliance
persists, credit transactions may not be authorized, and the municipality may not
have access to certain funding mechanisms. Ultimately, persistent breach that is con-
sidered harmful to the general interests can even lead to the dissolution of certain
municipal bodies.
Finally, building upon the previous literature, municipalities’ political ideology,
political competition and population size may affect these measures. Thus, the differ-
ent impact that these factors may have across municipalities should also be examined.
With these goals in mind, we examine a sample of 90 Spanish local governments
with populations of over 50,000. We focus on larger municipalities to ensure consis-
tency in the nature of the public services offered by the municipality, as they depend
on the number of inhabitants of the municipality (Law no. 7/1985). The sample period
runs from 2010 to 2012. This period is particularly interesting because during that
time, the central government was concerned about local governments’ debt levels
and deficits, and tightened the restrictions on local governments.
We contribute to the prior literature in three ways. First, to the best of our knowl-
edge, studies that analyze the delineation of the public sector are rare, and the few
studies that do address this topic mainly use qualitative approaches to analyze the
conceptual framework of national accounting (Dabicco, 2015). In our study, we em-
ploy a quantitative approach to address the issue, and we quantify the potential ef-
fects of enforcing different consolidation perimeters of the GGS on key local govern-
ment ratios. Additionally, prior studies suggest that municipalities may create sep-
arate entities to elude legal restrictions on public deficit and debt. In this paper, we
directly observe the potential impact of including these entities within the perimeter
of GGS consolidation on the degree of compliance. Finally, we contribute to the ongo-
ing debate about the accounting harmonization and the comparability of accounting
and statistical information in EU Member States.
151
The remainder of the paper analyzes as follows: section two introduces the reg-
ulatory framework for classifying public corporations under the ESA concept of the
GGS, section three reviews the previous literature and proposes hypotheses, section
four describes the data and the methodology, and section five presents the results.
Finally, section six offers final conclusions.
2. Regulatory framework
EU Member States are required to prepare their national accounts in accordance
with the ESA, and government deficit and debt statistics are strictly based on the ESA
concept of the GGS. Under the Maastricht Treaty, Member States must comply with
specific fiscal discipline rules, particularly those that require states to maintain public
account deficits below a threshold of 3% of the GDP benchmark, and public debt lev-
els below 60% of GDP.
In Spain, the central government has imposed several restrictions on sub-nation-
al public administrations to control public deficit and debt levels. Law no. 18/2001
imposed an annual budget balance on all levels of government, which means that
non-financial revenues must at least cover non-financial expenses. Furthermore, this
law and Royal Decree-Law no. 2/2004 restrict total municipal debt. In particular, the
central government prohibited local governments from accruing new long-term debt
if their total debt exceeds 110% of their operating revenues. As the economic situation
has evolved since those laws were originally enacted, the limit has undergone several
changes (from 100% in 2009 to 75% in 2011 and 2012).
According to ESA 2010, an entity is classified in the GGS if it is an institutional unit,
it is controlled by the government, and it is a non-market producer. The non-market
nature of an entity means that its products or services are provided free of charge or
sold at economically non-significant prices. However, the concept of economically
significant price is difficult to define in practice, and the boundary between market
and non-market production is far from distinct, such that a pragmatic rule is used in
these cases. This test is referred to as the ‘50% market test’, which primarily means
that if sales cover a majority of the production costs over a sustained period (3 years
or more), the entity is considered market (and hence included in the NFS); otherwise,
it is considered non-market (and therefore included in the GGS). Moreover, com-
pared to the previous ESA 95 (European Union Council, 1996), ESA 2010 emphasizes
the qualitative aspects of the criteria for delimiting the GGS such that only public cor-
porations driven by market competition are excluded from the GGS, and a significant
increase in the number of corporations within this sector is expected.
3. Literature review and hypotheses development
Prior researches in Spanish municipalities have studied the determinants of debt
levels (Benito and Bastida, 2004; García-Sanchez et al., 2011; Benito et al., 2011; Brusca
Alijarde et al., 2012; Cuadrado Ballesteros et al., 2013b; Pérez López et al., 2013; Pérez
López et al., 2014), the effectiveness of general fund balanced budgets and debt con-
152
straints at limiting debt levels (Cabasés et al., 2007) and, more recently, the type of
restrictions that are most often breached in this context (Benito et al., 2015).
Some of these studies – which are generally closely related to our research – find
a positive relationship between municipal decentralization and the level of debt and
conclude that local governments may create new entities to assume transfers of mu-
nicipal debt, which then show up on the financial statements of these corporations.
However, although these studies do not consider whether these new entities are clas-
sified as GGS or NFS corporations, they intuitively suggest that local governments
use such decentralization to avoid debt limits.
Regarding regional governments or autonomous communities, Fernández-Lle-
ra and García-Valiñas (2013) find a significant link between public debt outside the
consolidation perimeter of the GGS and the number of public corporations, which
suggests that regional governments decentralize to circumvent fiscal rules (the ‘shift
effect’).
Drawing on this prior literature, as long as municipalities attempt to avoid debt
limits by creating new entities to which they transfer their municipal debt (Cuadrado
Ballesteros et al., 2013b; Fernández-Llera and García-Valiñas, 2013; Pérez López et al.,
2014), we expect that including NFS and PC corporations within the perimeter of GGS
consolidation will increase the debt ratio; in other words, the increase in outstanding
debt is larger in proportion than the increase in total current revenues. Accordingly,
we posit our first hypothesis as follows:
H1: Moving public corporations that are currently outside of GGS consolidation
within the GGS perimeter will lead to a significant increase in the debt ratio of
municipalities.
With respect to non-financial deficit/surplus, to the best of our knowledge, no em-
pirical study has yet assessed the relationship between decentralization and public
deficit. However, in a closely related and interesting study, Jorge et al. (2014) examine
the relationship between non-financial deficit/surplus based on both micro and mac-
ro systems of government accounting and find material divergences between the two
systems related to the definition and scope of the reporting entity (i.e., the GGS pe-
rimeter). Taken together with results from previous studies, this result suggests that
local governments may use decentralization to elude legal limitations, and it would
thus be reasonable to expect a significant deterioration in non-financial deficit/sur-
plus ratios as a result of including public corporations within the GGS consolidation
perimeter. Accordingly, we propose the following as our second hypothesis:
H2: Moving public corporations that are currently outside of GGS consolidation
within the GGS perimeter will lead to deterioration in the non-financial deficit/
surplus ratio of a municipality.
As a consequence, assuming that municipalities use public corporations whose
deficit and debt are not consolidated as a means of circumventing fiscal rules, in-
cluding these companies within the perimeter of GGS consolidation will lead to a
153
significant increase in the number of municipalities that violate deficit and debt re-
quirements. Accordingly, we stipulate our third hypothesis as follows:
H3: Moving public corporations that are currently outside of GGS consolidation
within the GGS perimeter will lead to an increase in the number of municipali-
ties that violate deficit and debt limitations.
In line with previous studies that have examined the influence of political factors
and population size on regional and local government decentralization and munici-
pal debt levels, we also believe that the impact of consolidating these public corpo-
rations within the perimeter of the GGS will differ depending on political factors,
such as the locality’s political ideology, political competition, and on the size of the
population.
Previous empirical research has yielded mixed results regarding political ideol-
ogy. On the one hand, some studies find that right-wing parties favor low levels of
public debt (Blais and Nadeau, 1992; Kiewiet and Szakaly, 1996; Dickson and Yu,
1997; Fernández-Llera and García-Valiñas, 2013) and favor decentralization processes
(Dijkgraaf et al., 2003; Walls et al., 2005; Cuadrado Ballesteros et al., 2013a). On the oth-
er hand, other studies do not find any significant relationships in this regard (Abiza-
deh and Gray, 1993; Benito and Bastida, 2004, González-Gómez and Guardiola, 2009;
Bel and Fageda, 2010; Benito et al., 2011; Pérez López et al., 2014).
The second political factor is political competition. Some studies have reported
higher levels of decentralization and debt with lower levels of political competition
(Ni and Bretschneider, 2007; Smith and Fridkin, 2008; Cuadrado Ballesteros et al.,
2013a, 2013b; Pérez López et al., 2014). However, other studies have found that mu-
nicipalities characterized by weaker political competition report lower levels of pub-
lic debt (Ashworth et al., 2005; Benito et al., 2011).
With regard to the influence of population size, several studies have found that
population size positively influences the level of debt and decentralization because
citizens in larger municipalities tend to make greater demands for public services
(Vallés Giménez and Zárate Marco, 2001; Escudero and Prior, 2002; Mora Agudo and
Montesinos Julve, 2007; Brusca Alijarde et al., 2012), which is particularly significant
in Spain because the law establishes a range of services to be rendered by the munic-
ipalities based on population size. However, other studies found no such significant
relationship (Brusca Alijarde and Labrador Barrafón, 1998; Benito and Bastida, 2004).
Drawing upon previous studies, we believe that changes in municipalities’ non-fi-
nancial deficit and debt ratios before and after consolidation will depend on the
municipality’s size, political ideology and political competition. Thus, we posit our
fourth hypothesis as follows:
H4: Moving public corporations that are currently outside of GGS consolidation
within the GGS perimeter will have a differential impact on the change in
non-financial deficit/surplus and debt ratios that depends on a given munici-
pality’s size, political ideology and political competition.
154
4. Methodology
4.1. Research design
The goal of this paper is to assess the potential impact on key local government
ratios that would result from including NFS and PC corporations within the perim-
eter of GGS consolidation (i.e., as a result of the application of the new ESA 2010). In
particular, we study the impact on the following two ratios:
1. The non-financial deficit/surplus ratio (Deficit/Surplus), defined as the net lend-
ing/net borrowing of the consolidated units divided by current revenues.
��������������� = ����������������������������������������� [1]
2. The debt ratio (Debt), defined as the outstanding debt of the consolidated units
divided by current revenues.
[2]
The methodology used in our empirical study unfolds over several stages. First,
we obtained the consolidated financial budget of the Spanish local governments in
our sample, which consisted of the financial budget of a given municipality and the
budgets of the autonomous bodies dependent on it. Second, all public corporations
owned by those municipalities were identified in order to obtain their financial infor-
mation and to classify them as included in the GGS or as NFS or as lacking classifica-
tion under the ESA. This approach allowed us to identify the public corporations that
were outside the GGS perimeter of consolidation (NFS and PC corporations). Third,
we aggregated1 the financial information of the municipality and its subsidiaries clas-
sified as GGS corporations under the ESA, and then we added to the latter the finan-
cial information of the NFS and PC corporations. As a result, this second database
also consists of public corporations that are currently outside the scope of consoli-
dation. Finally, we calculate the deficit/surplus and debt ratios before and after the
inclusion of NFS and PC corporations within the scope of consolidation (designating
these ratios as Deficit/Surplus_before, Debt_before and Deficit/Surplus_after, Debt_after).
Hypotheses 1 and 2 (H1 and H2) both predict a deterioration in the deficit/sur-
plus and debt ratios as a result of including NFS and PC corporations in our GGS
consolidation. To examine the differences in these key ratios, we first analyzed the
descriptive statistics and the changes in the items used to calculate these ratios. The
Shapiro-Wilk test was used to test for normality. We can confirm that in our sample,
financial ratios do not follow a normal distribution; therefore, we run non-parametric
Wilcoxon sign-rank tests to look for significant differences in the means of the ratios
before and after the consolidation.
1 One limitation in our data is that we cannot consolidate (as opposed to aggregate) financial infor-
mation.
155
Second, to test Hypothesis 3 (H3) we analyzed the compliance with deficit and
debt limits before and after consolidation to assess whether consolidating public cor-
porations outside the GGS perimeter increased the number of municipalities that vi-
olated the deficit and debt limits. To examine the relationship between the level of
compliance before and after consolidation, we used a comparison test of proportions.
Finally, based on the previous literature and in alignment with Hypothesis 4 (H4),
we expected that the variation in municipalities’ non-financial deficit and debt ratios
before and after consolidation would differ based on the municipality’s size, dom-
inant political ideology and political competition. As discussed above, the same 90
municipalities comprise our sample over three years; therefore, panel data methodol-
ogy was applied to test H4. The dependent variable was the comparability index (CI)
for each of the ratios considered, and political ideology, political competition and size
were the independent variables.
The comparability index for municipality i was calculated as follows to determine
the percentage of variation in the ratios before and after consolidation:
[3]
The independent variables included in the model were as follows:
– Political ideology: we employed a dummy variable with the value of 1 if the
dominant political party in the municipality was identified as ‘left-wing’, and
0 otherwise. The methodology followed in grouping the dominant party in the
municipality is in line with the approach adopted by Pérez López et al. (2014).
– Political competition: we employed a dummy variable taking the value of 1 if the
political party in the municipality leadership has won an absolute majority in the
elections, and 0 otherwise.
– Population: we measured the size of the municipality in terms of the number of
inhabitants.
The following databases were used in our analyses:
1. Information regarding consolidated financial budgets, outstanding debt and the
population of municipalities were obtained from the Virtual Local Government
Financial Coordination Office of the Ministry of Economy and Finance (OVEELL,
2010, 2011 and 2012).
2. To identify those public corporations owned by the municipality and to obtain
their classification, we used reports regarding the composition and structure of
state companies and foundations released annually by the IGAE (IGAE, 2010,
2011 and 2012).
3. Financial information regarding public corporations was obtained from the Siste-
ma de Análisis de Balances Ibéricos (SABI) database (SABI, 2004).
4. Information regarding the political ideology and political competition in a given
municipality was obtained from published electoral results (Spanish Ministry of
Home Affairs, 2010-2012).
156
4.2. Data selection
We restricted our sample to those municipalities with populations of over 50,000
inhabitants (145 municipalities) for two main reasons. First, it has been argued that
population size is an appropriate criterion in public municipality sample selection, as
the slate of public services that larger municipalities provide is more homogenous. In
addition, financial information is both more readily available and more reliable for
larger municipalities than for smaller municipalities.
The sample period runs from 2010 to 2012 because it corresponds to the most re-
cent available data. In addition, the central government tightened requirements for
local governments during this period based on concerns regarding uncontrolled debt
levels, and because of the non-fulfillment of budget balances by many sub-central
governments.
Our initial sample consisted of 145 municipalities but not all had subsidiaries, leav-
ing us with a sample of 123 municipalities that own a total of 516 public corporations.
Financial information for 107 companies was unavailable mainly because they were
being liquidated, which reduced the sample to 409 public corporations. This sample
corresponds to 148 GGS corporations (36.2%), 206 NFS corporations (50.4%) and 55
PC corporations (13.4%). Furthermore, the subsidiaries of 33 municipalities in 2010
and 2011 and 38 municipalities in 2012 were all classified as GGS corporations, which
means that they did not hold shares in any corporations outside the GGS perimeter,
and they were thus excluded from the sample. As a result, our final sample consists
of 90 municipalities in 2010 and 2011 and 85 in 2012 (265 observations), and 181, 187
and 176 public corporations in 2010, 2011 and 2012, respectively (544 observations).
5. Results
5.1. Descriptive statistics
Table 1 shows the descriptive statistics for the impact of including NFS and PC
corporations within the perimeter of GGS consolidation. Regarding the items used to
compute the ratios, the average increase in current revenues is 6.1%, which is less sig-
nificant than the average increase in net lending/net borrowing (average 21.4%) and
debt (average 23.4%). Consequently, the descriptive statistics for Deficit/surplus_be-
fore, Deficit/surplus_after, Debt_before and Debt_after ratios show that the level of debt
(outstanding debt to current revenues) increased from 0.708 to 0.815, and that the
deficit/surplus ratio dropped from -0.003 to -0.006 after including NFS and PC cor-
porations within the perimeter of consolidation. The Shapiro-Wilk tests for the null
hypothesis (that the ratios and the differences in the ratios are normally distributed)
must be rejected for all the variables (p = 0.000), which means that non-parametric
tests are used subsequently.
157
Table 1: Descriptive statistics of debt and deficit/surplus ratios
Mean Median Min Max N Shapiro-Wilk test (p-value)
Panel A: Impact of consolidation on current revenues, net lending/net borrowing and debt
% Change in current revenues 6.1106% 2.9344% -53.0950% 174.8175% 265
% Change in net lending/net borrowing 21.4077% 0.1015% -1,759.7240% 8,767.5090% 265
% Change in debt 23.4232% 9.7724% 0.0000% 295.7076% 265
Panel B: Descriptive statistics of debt and deficit/surplus ratios and test of normality
Deficit_before -0.0026 0.0021 -2.0988 0.6880 265 0.0000
Deficit_after -0.0064 -0.0086 -1.2111 1.2092 265 0.0000
Difference -0.0038 -0.0106 0.8877 0.5212 265 0.0000
Debt_before 0.7080 0.6397 0.0064 3.0480 265 0.0000
Debt_after 0.8152 0.7180 0.0081 3.3857 265 0.0000
Difference 0.1072 0.0783 0.0017 0.3377 265 0.0000
5.2. Differences in ratios
We applied the non-parametric sign test to examine Hypotheses H1 and H2. Nota-
bly, the sign test does not require assumptions regarding the form of the distribution
of the measurements, and it is thus used for testing the null hypothesis that positive
and negative changes in differences are equally likely (or, equivalently, difference in
the median values is zero).
Table 2 shows the differences (and the statistical significances) between the medi-
an values of the deficit and debt ratios both before and after including NFS and PC
corporations within the consolidated GGS perimeter. Both tests are significant at the
level of p < 0.1 for both the deficit/surplus ratio and the debt ratio. We must therefore
reject all the null hypotheses that the difference in the median values of the ratios be-
fore and after consolidation is different from zero. These results thus confirm H1 and
H2, and we can conclude that moving public corporations that are currently outside
of GGS consolidation within the GGS perimeter leads to a substantial deterioration of
the deficit/surplus and debt ratios of the municipalities.
Table 2: Medians of ratios and Wilcoxon sign-test results
Ratio Before (Median) After (Median) Difference Change in % Sign-testp-value Result
Deficit 0.0021 -0.0086 -0.0065 -311.28% 0.0880 Accept H1
Debt 0.6397 0.7180 0.0783 12.25% 0.0000 Accept H2
5.3. The impact of consolidation on compliance with deficit and debt limits
This section will address Hypothesis 3 (H3). In addition to the significant changes
in the value of the debt and deficit/surplus ratios, we are interested in testing wheth-
er they led to an increase in the number of municipalities that would now violate
158
the limits. As noted in section 2, all levels of government (central, regional and local
governments) are prohibited from running non-financial deficits, and total municipal
debt is also restricted. With regard to the debt limit, the ratio of total debt over current
revenues was prohibited from exceeding 110% in 2009, but the central government
increased this limit to 125% in 2010, and then reduced it to 75% in 2011 and 2012. In
our tests, we used the 75% limit for every year to segregate the effects of the change
in the consolidated GGS perimeter from the effects of the change in debt limits on the
level of compliance.
A test of proportions is performed to test the null hypothesis that the proportion of
municipalities that violate the limit is equal before and after consolidation against the
alternative that it is more likely following consolidation (i.e., the difference between
proportions is negative). Table 3 shows that there were 96 cases before consolidation
(36.2%) and 125 cases (47.2%) following consolidation in which the municipalities
were in violation of legal limits. The results in Table 3 also show that the difference
between these two proportions is statistically significant (p-value = 0.010).
We run the same test with regard to the deficit limit (no deficit). Table 4 shows
that there were 129 pre-consolidation cases (48.7%) in which the municipalities were
in breach of the deficit limit, and that number increased to 143 (54.0%) following con-
solidation. However, there is no significant difference in the proportions, as Table 4
shows (p-value = 0.224).
Table 3: Test of the equality of proportions: debt limits
Total cases Number of non-compliance cases Proportion
Before 265 96 0.362
After 265 125 0.472
p-value 0.010
Table 4: Test of the equality of proportions: deficit limits
Total cases Number of non-compliance cases Proportion
Before 265 129 0.487
After 265 143 0.540
p-value 0.224
5.4. The influence of political factors and municipality size
on the differences in ratios
As reported earlier in the literature review section, prior research regarding the in-
fluence of political factors on decentralization and on the level of debt was not conclu-
sive. Several studies showed that the political ideology of the ruling party and local
government fragmentation influence the level of debt carried by and the decentral-
ization of a municipality. Concretely, these studies found that right-wing parties and
local governments characterized by weaker competition were more likely to rely on
159
public corporations to deliver public services. Regarding debt levels, municipalities
with right-wing parties and those that were characterized by a strong political major-
ity in the leadership of the municipality tended to have higher levels of debt. There-
fore, we believe – in line with our Hypothesis 4 (H4) – that the impact on the changes
in the deficit/surplus and debt ratios as a result of consolidating public corporations
within the GGS will vary depending on these political factors. Furthermore, based
on the previous literature, we also believe that there will be a differential impact on
changes in both the deficit/surplus and debt ratios based on the size of the population
of a given municipality.
As noted in Section 4.1, a panel data methodology was applied to test H4. The de-
pendent variable was the CI for each ratio considered, and political ideology, political
competition and size were included as the independent variables. The Breusch-Pagan
Lagrange multiplier test for random effects clearly recommends this alternative in
lieu of ordinary least squares (OLS) estimation, in which the dependent variable is
the CI based on the debt ratio. In addition, the Hausman test used in order to choose
between fixed and random effects estimators finds different results depending on the
model. However, the Breusch-Pagan Lagrange multiplier test recommends an OLS
estimation in which the CI is based on the deficit/surplus ratio. We therefore run the
OLS pooled estimation for the CI based on the deficit/surplus ratio and run the fixed
effect specification for the CI based on the debt ratio.
Table 5 shows the results of the estimation for the OLS model, and the results us-
ing the fixed effect estimator for the CI based on the deficit/surplus and debt ratios,
respectively. The population size of the municipality and political competition do not
seem to be significant variables in this analysis. Regarding the political ideology vari-
able, the variation in the debt ratio is higher when the dominant political party in the
municipality is identified with a ‘right-wing’ ideology. This result is in line with those
of Fernández-Llera and García-Valiñas (2013) and Cuadrado Ballesteros et al. (2013a).
However, there is no significant relationship between the variation in the deficit/sur-
plus ratio and the political ideology of the party in charge of the municipality.
Table 5: Fixed effects with ‘Cluster’ for the comparability index (CI) based on the deficit/surplus and debt ratios
Dependent variable
CI_Deficit/Surplus CI_Debt
OLS Fixed effects
POLITICAL IDEOLOGY 0.5455 -0.3188 (**)
POLITICAL COMPETITION 0.1368 0.0176
POPULATION 0.1612 -2.7006
Constant -1.4892 3.2240
Number of observations 265 265
R2 0.0042 0.1241
F Test 0.22 3.97 (***)
Hausman test χ2 --- 8.79 (**)
* , **, and *** denote statistical significances at the 10%, 5% and 1% levels, respectively.
160
6. Conclusions
The macro monitoring of fiscal policy in the European Union is performed using
deficit and debt figures derived from GGS accounts that are based on the ESA con-
cept of the GGS. Regarding public corporations controlled by governments at every
level (central, regional or local governments), the GGS consolidates only those that
are non-market.
Our results show the expected significant worsening of Spanish municipalities’
deficit/surplus and debt ratios when public corporations are moved from outside to
within the perimeter of the GGS. Thus, a number of municipalities that meet the defi-
cit and debt targets before consolidation fail to meet them after consolidation. How-
ever, we find a significant difference in the proportion of municipalities that fail to
comply with the targets only with regard to the debt limits. This result is in line with
previous researches that suggest that public corporations may be used to hide debt
and circumvent debt limits (Cuadrado Ballesteros et al., 2013b; Fernández-Llera and
García-Valiñas, 2013). Furthermore, our results show that the variation in the debt ra-
tio is higher when the political party in the municipality is identified by a ‘right-wing’
ideology. However, no significant variation relationship is found for the size of the
population or political competition.
Taken together, our results show that different interpretations of the elements that
influence the classification of entities inside or outside the perimeter of the general
government (e.g., a market/non-market analysis) might lead to major differences in
these two key figures. Different classifications may also result in a greater number
of municipalities violating the deficit and debt limits imposed on the governments,
which is important because many countries, Spain among them, levy severe penalties
on sub-central governments that fail to meet debt ceilings or that run non-financial
deficits.
Policy makers in the EU require high-quality comparable accounting data from
the GGS to produce the information on which many EU policies are based, and to rea-
sonably monitor and control budget deficits and public debt. In this sense, our results
have certain implications for policy makers, who must consider that the complete
and exhaustive identification and correct classification of units is critical to accurate-
ly delineating the GGS, and to ensure that deficit and debt figures are comparable
across countries. Consequently, EU policy-makers should ensure the homogeneous
application of the criteria set forth in the ESA for classifying units in the GGS among
EU Member States, particularly the application of the qualitative requirements that
are more sensitive to interpretation. Furthermore, data reported for the convergence
criteria under national accounts (macro system) are obtained from the public ac-
counting systems of each country (micro system), and prior researches have revealed
significant conceptual differences between the two systems, particularly regarding
the GGS consolidation perimeter. Most EU members do not require the preparation
of consolidated annual accounts at the local level. If standard-setting bodies were to
impose consolidated financial reporting requirements under the public accounting
161
system, it would help to improve decision-making and reduce the gap between the
two accounting systems, in addition to contributing to the transparency and quality
of public information.
We believe that this paper contributes to the ongoing debate about the conver-
gence between the micro and macro systems of government accounting information
in the EU Member States, particularly regarding consolidating public entities’ ac-
counts within the GGS perimeter. Such consolidation is considered the largest con-
ceptual difference between national accounting and public sector accounting. Fur-
thermore, ESA 2010 is meant to expand the perimeter of GGS consolidation, and this
paper simulates the impact on deficit and debt from considering a larger GGS consol-
idation perimeter. Therefore, public policy makers and politicians alike may find this
information useful for both their decision making and for drafting future policies.
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