Municipal Fiscal Austerity

• Applicant: Professorin Dr. Zohal Hessami
• Subject Area: Economic Policy, Applied Economics
• Term: since 2025
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 569719701

We will extend the literature on the consequences of fiscal austerity at the local level by considering a prominent example of a conditional bailout program in Germany. In all three work packages, we will study the introduction of a bailout program in Hesse, the so-called Schutzschirm. In 2012, the Hessian state government provided 3.2 billion Euros to partially bail out financially distressed municipalities. In return, municipalities had to commit to strict consolidation measures monitored by the state fiscal supervisory authority. Eligible municipalities were identified based on specific debt and deficit criteria and upon participation had to achieve budget balance for at least three consecutive years by 2020 at the latest. These types of conditional bailout programs have become more popular in recent years to reduce soft budget constraints by ensuring a future path to be followed. WP1: Bailout municipalities were given considerable leeway in choosing their consolidation strategies: cutting expenditures, raising fees and local taxes, or both. We still know little about which strategy to consolidate debt is optimal. The Hessian case is of particular interest in this regard as municipalities signed consolidation agreements in which municipalities chose and committed to a path to be followed. Assuming that local policymakers themselves know best the local realities and circumstances, we hope to learn more about the variation in consolidation paths taken and the potential resulting success in avoiding a substantial economic downfall. WP2: While the recent literature on uninteded consequences of fiscal austerity is growing, we will contribute two new dimensions to this literature. One is on consequences with regard to creative accounting practices, i.e. shifting debt into state-owned companies, thereby hiding rather than effectively reducing it. So far, there is no causal evidence on fiscal rules inducing creative accounting. Considering that the total number of local state-owned enterprises all over Germany has increased considerably over the past decade, it is likely that these opportunities for debt-shifting were indeed used. To study this question, we will obtain access to a comprehensive firm-level panel dataset covering all German SOEs since 2008, including detailed balance sheet information. WP3: Our second contribution to the literature on unintended consequences of austerity concerns medium-/long-term effects on municipal resilience. In particular, we will study whether austerity has affected critical public good provision and reduced the number of (intensive-care) hospital beds and healthcare staff and whether this explains differences in Covid-19 mortality rates across Hessian municipalities. This would indicate that fiscal budgeting that is too tight makes municipalities vulnerable to unforeseen shocks. A policy implication could be that austerity needs to be followed by a subsequent plan to rebuild municipal resilience.

• DFG Programme: Research Grants