Subnational fiscal accounts under pressure: the effects of COVID-19 in a developing country

Keep in mind

The series Documentos de trabajo sobre economía regional y urbana (only in Spanish, Working Papers on Regional and Urban Economics) is a publication of Banco de la República in Cartagena. The opinions contained in this document are the sole responsibility of the authors and do not commit Banco de la República or its Board of Directors.

AUTHOR OR EDITOR
Gerson Javier Pérez-Valbuena
Paula Barrios

The series Documentos de Trabajo Sobre Economía Regional y Urbana is a publication of Banco de la República in Cartagena. The opinions contained in this document are the sole responsibility of the authors and do not commit Banco de la República or its Board of Directors.

Publication Date:
Wednesday, 06 April 2022

Abstract

The consequences of the most generalized lockdowns in the recent history promptly brought the deepest falls in consumption, production and employment, and the consequent increase in poverty. So far, almost all literature has focused on the effects of the lockdowns in the private sector  and the national level of the public sector, while analyses on subnational governments’ finances have been overlooked, especially in developing countries. This paper’s main purpose is to fill this gap by analyzing the particular case of Colombia with its two levels of local governments,  departments and municipalities. In particular, using a difference in differences approach and a quarterly panel dataset, we identify the extent at which lockdowns affected revenues, expenditures, investments and debt service of subnational governments. The results show that local public finances faced a  strong turn down, especially regarding revenues. For municipalities, the industry and commerce tax, and the property tax were reduced substantially while for departments beer, wine and liquor tax, and vehicle tax were the most affected. The effects on the expenditures are weaker and less evident, while investment showed a clear sectoral heterogeneity.