Conferences at Department of Economics, University of Toronto, RCEF 2012: Cities, Open Economies, and Public Policy

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Feeding the Creatures: Borrowing and the Hard budget constraint- Ontario Municipalities in the 1930s

Almos Thomas Tassonyi

Last modified: 2012-07-12


As governance in many countries has become decentralized, a process furthered by globalization and political transformation, the
fiscal consequences have not always been salutary. The institutional and quantitative characteristics of the establishment of the hard
constraint in Canada remain to be examined In the 1930s, the provincial government imposed a long-lasting hard budget constraint on
Ontario municipalities. The imposition of supervision improved the fiscal circumstances of municipalities as shown by the standard tax
and debt indicators and likely reduced the cost of borrowing for others. This action, while spurring reduced borrowing activity on the
part of municipalities seems to have had the effect of spurring more provincial borrowing thus widening the actual impact of taxation and
indebtedness. While the Province did not "bail-out" the defaulting municipalities, the imposition of supervision may have been perceived
by creditors as an implicit guarantee that debts would be repaid. The taxpayers in a municipality however did not escape the obligations
created. Disaggregated data is used to assess standard indicators of municipal fiscal health before and after provincial intervention. The
data is also used to assess the importance of the factors that contributed to the probability of municipalities going into default
from those that did not. Further, the relationship between differences in coupon rates on municipal borrowing and differences in fiscal
variables is also addressed using appropriate correlations.

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