Published date01 September 2016
Date01 September 2016
doi : 10. 1111/p adm .12251
This article investigates the impact of institutional factors on the relationship between grant fund-
ing and local debt in England and Germany. Using a panel dataset covering the period 2005–12,
the research identies a positive relationship between grants and local debt. The positive relation-
ship between grants and debt is reduced due to the impact of political and administrative variables.
The ndings demonstrate three shortcomings of the current literature. First, in contrast to the domi-
nant portrayal of German local administration as predominantly legalistic, partisan dynamics affect
the allocation of grants to the German local level. Second, institutional variables operate differently
depending upon grant type, providing a rationale against the scholarly practice of using aggre-
gate grants. Third, grant mechanisms provide a promising key to unlock institutional dynamics in
systems of multilevel governance, but only when scholars integrate institutional differences more
explicitly in their research design than hitherto accounted for by political economy.
Governments across Europe have been implementing austerity policies in recent years.
Responsible for approximately a quarter of total government spending, many local gov-
ernments (LGs) in the EU have experienced funding cuts. As grant funding constitutes a
major income source for LGs, austerity measures are likely to be implemented via changes
in grant funding arrangements. This article demonstrates that grant funding to the local
level increases local nancial stress in England and Germany. The relationship between
local nancial stress and grants is critically affected by country-specic intergovernmen-
tal dynamics. The core indicator used in this article to ascertain local nancial stress is
local debt.
Local debt poses an increasing risk for local nances, due to the absorption of current
revenue expenditure pressures into capital expenditureborrowing. Due to decient moni-
toring structures on local nances in both England and Germany,a ‘capitalization’ of local
nancial stress occurs. In addition, in Germany current revenue pressuresare widely dealt
with at the local level by issuing short-term debt. Although offering substantial interest
rate benets, short-term liquidity poses signicant interest rate risks and renancing risks
to LGs. As English and German LGs are involved in the provision of core services to cit-
izens, and intergovernmental liability structures in the potential case of a local nancial
default are marked by ambiguity, growing local debt may have serious implications for
the sustainability of local service delivery. This article demonstrates that LG debt, as a rel-
evant nancial stress indicator, is critically affectedby nancial transfers LGs receive from
higher government levels.
Despite the large volumes of public funding involved, grant funding systems to local
government receive limited scholarly attention. As a supposedly economic topic but with
strong institutional dimensions, the study of nancial redistribution systems has fallen
victim to a largely still mono-disciplinary functioning social sciences. A large literature on
Dennis de Widt is at the University of Exeter Business School, University of Exeter,UK.
Public Administration Vol.94, No. 3, 2016 (664–684)
© 2016 John Wiley & Sons Ltd.
grant systems can be found in the public nance literature, traditionally characterized by
a highly theoretical approach (Buchanan 1952; Oates 1972). Although empirical studies on
redistribution have increased in recent decades, empirical work is focused on grant sys-
tems between the central and regional government levels (Grossman 1994; Khemani 2007).
In addition, the applied methodological approach is biased towards single country stud-
ies, with Buettner (2009) constituting the only empirical study comparing grant systems
towards the local level across countries (Germany and the US). Due to this research focus,
little is known about the impact of institutional factors on grant funding received by LGs.
To illuminate the meaning of institutional variables, this article follows Mill’s
(1843/1872) different systems approach and compares the working of grant mecha-
nisms towards the local level in the UK and Germany. In the UK’s case, the analysis is
limited to England, which reects the UK’s traditionally highly centralized government
structure. In line with Germany’s federal structure, grant mechanisms differ among the
German states and so the article concentrates on North Rhine-Westphalia (NRW). As the
state with the largest population and economy in Germany,NRW is a relevant illustration
of the institutional framing of grant funding to the German local level. The contribution
of this article is that it demonstrates that institutional variation signicantly impacts
the relationship between LG debt and grant funding. In doing so, the article not only
demonstrates the shortcomings of the dominant political economy approach towards
intergovernmental nances, but also illuminates the importance of the study of public
nance structures to enhance our understanding of the working of institutions of public
The empirical analysis presented here demonstrates a positive relationship between
grant funding and local debt. The debt-enhancing effect of grants is reduced by institu-
tional variables that are exogenous to the formal technical design of the grant system.
Using panel data regression techniques the analysis demonstrates that in England, central
government allocates lower-risk grants to local councils who show party-political symme-
try with the incumbent central government. In NRW,an institutional effect is concentrated
with specic grants. Whereas non-technical grant drivers primarily operate from the top
down in England, the NRW system demonstrates an additional bottom-up effect, with
local political actors being able to affect their specic grant funding.
The rest of the article is structured as follows. First, hypotheses are developed in light
of the empirical literature on LG debt and redistribution systems. The subsequent section
describes the institutional characteristics of grant funding in England and NRW. Section
four provides a description of the dataset and presents the model to analyse the effects
of political and administrative variables on the grant–debt relationship. Section ve sets
out the quantitative empirical results. To compensate for the methodological problems
attached to quantitative research, the statistical results are triangulated with qualitative
research ndings in section six. The last section concludes the article.
There are a limited number of studies that use micro-level data to analyse how grant
funding affects the nancial position of governments. Studies that include grant variables
mostly analyse their effect on total expenditure or income (e.g. Veiga and Veiga 2007;
Mehiriz and Marceau 2014), which overlooks the consequences of grant funding on the
wider nancial position of the government entities involved. Meaningful indicators would
include the budget balance, debt, or reserve levels (see Jacob and Hendrick 2013). The few
Public Administration Vol.94, No. 3, 2016 (664–684)
© 2016 John Wiley& Sons Ltd.

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