FLYPAPER EFFECT AND PRECAUTIONARY SAVINGS IN PUBLIC SPENDING BY MUNICIPAL GOVERNMENTS IN PERÚ

Abstract

The objective of the research was to determine the effect of an increase in fiscal transfers in relation to an equivalent increase in tax revenues on local public spending in local governments in Peru. The method used is causal, based on precautionary savings, the target population is 1874 local governments of Peru-2019, grouped into three categories. Using the local expenditure and precautionary savings model, the presence of the flypaper effect was determined at the national level and by municipal category. The flypaper effect was found to be present at the national level (0.78 empirical and 0.66 based on precautionary savings) and by municipal category, public spending is greater with an increase in total transfers than with an equivalent increase in tax revenues (by 0.84% and 0.06% successively), likewise the flypaper effect is greater in municipalities with medium and low budget size. The local governments of the country, seeing larger budgets coming from subsidies, prefer to finance public goods and services with intergovernmental transfers than with tax revenues, because they are free distortion money, while tax revenues demand more control and results from the rulers, besides, the rulers are first concerned in spending the subsidies than the tax revenues, keeping the private revenues as savings, for later periods.