Evaluating local fiscal capacity and fiscal effort of Turkish local governments: Evidence from spatial panel data analysis

The local government reform carried out in Turkey in 2014 intended to strengthen fiscal decentralization. From this perspective, this study is the first to examine the impact of local government reform on the fiscal capacity and fiscal effort of Turkish local governments in 81 provinces over the period of 2007–2019. To measure the local fiscal capacities of the provinces where local governments are located, we utilize spatial analysis considering the disparities. We implement Spatial Durbin and Spatial Autoregressive Models to investigate the spillover effects of the local fiscal capacity and fiscal effort for the local governments. The main results of this study are as follows; (1) The aforementioned reform, contrary to its goals, negatively affected the fiscal capacity of local governments. (2) The increase in the shares obtained by the local governments from the general budget made these local governments more dependent on the central sources, which reduced fiscal effort. (3) As expected, fiscal decentralization has a positive effect on local fiscal capacity. (4) The fiscal capacities of municipalities are spatially dependent on each other. This paper fills a gap in the literature in terms of local fiscal capacity in Turkey and provides policymakers with a different perspective on what needs to be done to increase the local fiscal capacity.