The effects of fiscal rules on building permits and economic activity: quasi-experimental evidence

We provide quasi-experimental evidence of the effects of municipal budget rules on the level of local economic activity exploiting the fact that, in 1999, the Italian government imposed a balanced-budget fiscal rule on all municipal governments but in 2001 exempted municipalities below 5,000 inhabitants. Municipalities which remained subject to budget rules increased taxes but also experienced a significant increase in the number of firms and workers. The increase in taxes was largely financed through issuing more building permits, which led to higher urban revenues. To support the claim that building permits is a plausible mechanism which attracts more firms, in the face of higher taxes, we show that the positive impact of budget rules on employment growth and firms’ entry is concentrated in municipalities with no physical constraints to urban planning and development. (JEL D73, H72, R52, R31, R33).