The impact of revenue diversification on municipal debts: comparing short-term and long-term debt levels

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Issue Date
2018-12-07
Authors
Shon, Jongmin
Kim, Junghack
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Citation

Jongmin Shon & Junghack Kim (2018) The impact of revenue diversification on municipal debts: comparing short-term and long-term debt levels, Local Government Studies

Abstract

The extant literature has offered two competitive implications of revenue diversification: revenue stabilisation and fiscal illusion. Stabilisation helps governments have less revenue volatility, while fiscal illusion expands tax burdens through the increase in expenditure. The competitive views on revenue diversification leave a niche to explore the association between revenue diversification and debt levels in local governments. We estimate the static and dynamic effects of revenue diversification on both short-term and long-term debt levels in 150 fiscally standardised cities. Our findings show that local governments with greater revenue diversification are more likely to reduce short-term debts while expanding long-term debts. The findings imply that a stabilised revenue structure helps local governments better manage operational budgets but also invest in capital projects with greater debt capacity.

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