THE EFFECTS OF INTERGOVERNMENTAL TRANSFERS ON MUNICIPALITIES’ BUDGETS¹

This study estimates the effects of equalization grants and intergovernmental transfers to finance education and welfare on local government expenditures, local revenues, and local budget deficits based on panel data on 258 municipalities for the years 2005–17. I found that an increase of 100 shekels in equalization grants, which constitute one-fifth of total expenditures in disadvantaged municipalities, is associated with an increase of 82 shekels in total expenditures. That size effect is different depending on the particular expenditure. The biggest effect of equalization grants is on education and municipal spending, and in particular on transitory expenditures such as paying debt. In addition, this study reveals that equalization grants are used to reduce local budget deficits. As expected, the effects of intergovernmental transfers to finance welfare spending are greater than intergovernmental transfers to finance education. It reflects the binding matching requirement associated with welfare spending.