The impact of district borrowing

Long-term local government borrowing is justified theoretically on efficiency and intertemporal equity grounds. But the empirical effects of borrowing have not been widely studied. In this paper I estimate a difference-in-differences model to assess the impact of long-term district borrowing on capital spending, own fiscal capacity, public service provision, and external financial audit opinions. I find that, in general, district borrowing led to a significant increase in capital spending but that it had no effect on own-source revenue generation or service provision; on the other hand, borrowing appears to have resulted in a sharp decline in audit outcomes. I also investigate heterogeneity in borrowing effects by sorting districts into two groups: those that are relatively worse or better governed as based on pre-treatment audit opinions. District borrowing led to a similar increase in capital spending across the two groups. At the same time, borrowing among better-governed districts resulted in rising own-source revenues as well as improved household service access; borrowing had no effect on own-source revenue generation or service access in worse-governed districts. Finally, I also determine that borrowing’s negative impact on audit outcomes was exclusively concentrated in poorly governed districts. The empirical results in this paper provide a clear rationale for encouraging more local borrowing, but only among those districts that are well governed.