Access to credit and quality of expenditure: evidence from Brazilian municipalities

Abstract

The literature suggests that extra revenues received without counterpart by local governments in developing countries have little impact on the provision of public goods and services. Access to credit is considered a major obstacle to sustainable municipal development, but empirical evidence on the effectiveness of this instrument is scarce. In this paper, we evaluate the impact of loan operations on the quality of public expenditure, based on data from Brazilian municipalities between 2018 and 2021. We explore a discontinuity in the eligibility requirements for the Federal Government guarantee, which improves the financial conditions of the loan and makes it possible to contract a greater number of operations, and of greater value. Using a discontinuous regression design, it is found that loans have a positive impact on the quality of local expenditure, increasing investment while keeping personnel expenditure constant, and privileging health, urbanism, and sanitation functions.