Consolidation rules can distort the quality of information in national accounts. These rules may enable elected officials to strategically intervene in independently managed municipal enterprises in pursuit of zero-deficit budget targets at the local level.
Consolidation rules in national accounts are designed to enhance oversight when public resources are allocated to local government-owned enterprises to ensure consistent delivery of essential public services. However, our analysis reveals that these same rules can also accommodate actions that distort the quality of information reported in national accounts. Specifically, we refer to cases when compliance with a zero-deficit target may not necessarily indicate an ability to balance the budget. Instead, this is achieved by strategically managing consolidated entities’ operations. More concerning, consolidation rules enable this strategic intervention to occur stealthily. By consolidating the revenues and expenses of consolidated entities into the local government budget, subsidies from local governments to consolidated entities are effectively eliminated, making it difficult to trace how these interventions are directed.
While overstating fiscal health within approved accounting standards may be technically defensible (e.g., cost optimization), our analyses suggest that such practices often serve political interests, such as thwarting impending regulatory interventions that may disrupt elected politicians’ agenda or serving the fiscal targets at the national level when the locally elected politicians are aligned with the ruling party.
Our research scrutinizes the financial records of numerous, often small, municipal enterprises and tracks their classification as consolidated or non-consolidated in national accounts. Using this information, we uncover evidence of politically motivated spending cuts among local government-owned enterprises and statistically significant links between these cuts and the level of subsidies allocated by local governments.
These findings raise concerns about proposals to expand the consolidation boundary in the public sector, e.g., in the context of European Public Sector Standards. We argue that expanding the consolidation perimeter could give elected officials more opportunities to obscure their fiscal health reports, adding to the complexity of tracking these interventions and, ultimately, compromising the quality of budgetary/governmental reporting information. To this end, future developments of EPSAS could, for example, improve the disclosure regarding subsidies to consolidated entities to enhance stakeholder access to information and the accountability of elected politicians.
This blog is based on the following paper:
Dargenidou, C., de Vicente Lama, M. and Garcia Osma, B. 2024. Consolidation in National Accounts: Implications for Municipal Enterprises. Journal of Accounting and Public Policy,
