Diversification of Local Government Unit Interest Expenditure in EU Member States: Where and Why Does Local Borrowing Cost the Most?
DOI:
https://doi.org/10.52152/23.3.1-25(2025)Keywords:
Borrowing Costs, local government sub-sector, public debt, fiscal autonomy, interest ratesAbstract
This paper examines the factors determining the interest costs of local government (LG) sub-sector debt in European Union (EU) Member States. Using a panel data model with fixed effects, the study analyses how market interest rates, debt levels and fiscal institutions affect LGs' interest payments on debt. The study period covers the years 2004–2023. The results show that market rates have a greater impact on borrowing costs than outstanding debt levels, especially during periods of declining interest burdens such as 2012–2021. The study also suggests that a higher LG debt burden does not necessarily lead to greater financing costs when market interest rates are falling. Contrary to the existing literature, the research indicates that more financial autonomy of LGs does not lead to lower interest expenses (mainly in the old EU Member States). Instead, it suggests that stronger links between local and central finances, particularly through transfers, can reduce borrowing costs.
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