Three essays in public spending

Corbi, Raphael (2014) Three essays in public spending. Doctoral thesis, University of London: London Business School.

Abstract

This thesis analyzes the e{softsign}ectiveness of public spending in affecting local economic activity and educational outcomes, and how local spending is determined by the size of municipal legislative councils. The first essay analyses the effect of local public spending on municipal GDP. According to the Brazilian law, federal transfers to municipal governments vary discontinuously at numerous pre-determined population thresholds. Using these changes as locally exogenous changes to public spending, the causal effect of fiscal policy on economic growth is identified. The baseline estimates point to an average local multiplier of 1.7-2.1 across a range of specifications that control national business cycle, monetary policy and federal fiscal policy. The average effect masks considerable heterogeneity. Fiscal contractions decrease economic activity by 20%-40% more than expansion associated with fiscal expansion of similar. In addition, the participation of public administration (health) in total spending seems to increase (decrease) with the increases in federal transfers. In the second essay, I use a similar identification to quantify the impact of public spending on the quantity (number of pupils) and quality (test scores) of education. In addition, using school census data analyses how funds are spent and tries to shed some light on the mechanism through which spending educational outcomes. The third essay exploits a constitutional rule in Brazil that has been enforced in the municipal elections in 2004 that sets limits to the number of municipal councillors according to different municipal population brackets. By exploring this exogenous change, I am able to identify that a decrease in the size of legislature increases total spending over the subsequent mandate. Most of the increase is observed on spending in education and takes place during the subsequent election year, consistent with political business cycle theories. Moreover, the effect seems to be stronger in municipalities with weaker governance practices.