Budgetary solvency of Italian local governments: an assessment

The purpose of this paper is to investigate budgetary solvency (BS) as a part of the financial condition of local governments (LGs), considering that the growing demand for public services is primarily affecting this variable.

The study investigates a sample of 132 Italian LGs with more than 50,000 inhabitants for the period 2005–2014. The authors obtain a set of indicators as proxies of BS, which serve as the dependent variable of a regression model aimed at testing several independent variables which the authors are interested in, namely, financial autonomy, current equilibrium, level of indebtedness and investments.

BS, as well as its three indicators—sustainability, flexibility and vulnerability—are positively related to financial autonomy and current equilibrium and negatively related to the level of indebtedness and investments.

To cover citizens’ demands for public services guaranteeing sound financial management, policymakers are advised to control both the balance between current revenue and expenses and the level of indebtedness while preserving financial autonomy from external sources.

This study adds fresh insight to the literature on financial health, emphasising the relevance of public financial management.