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# Fiscal policy and economic activity: new causal evidence

## Details

**Authors** David M. Brasington, Marios Zachariadis

**Year** 2026

**Publisher** The Scandinavian Journal of Economics

**Kind of work** article

**Discipline** Economics

**Secondary disciplines** Public Policy

**Applied** false

[Read it at the publisher](https://doi.org/10.1111/sjoe.70011) 
10.1111/sjoe.70011

## In authors' words

### Abstract

We identify an exogenous cut in local taxes accompanied by an equivalent reduction in local government spending, and estimate the impact of these exogenous changes on income by applying a novel regression discontinuity design. This exploits a unique regional dataset that combines local income data with local voting outcomes on renewals of current expense tax levies. We find that balanced budget reductions in taxes and spending cause a large drop in local incomes, suggesting that government expenditure effects on income are larger than fiscal revenue effects. Importantly, this effect of local tax-financed government spending is prominent in low-income areas. Overall, our results regarding the effect of locally tax-financed government spending on income are suggestive of the importance of mechanisms related to the prevalence of liquidity constrained agents.

### What they set out to do (purpose)

To estimate the causal effect of locally tax-financed government spending on local income using an exogenous source of variation in tax and spending levels.

### Who or what was studied (sample)

A regional dataset combining local income data with voting outcomes on renewals of local tax levies, centered on votes falling near the 50 percent pass/fail threshold.

### How they did it (methods)

Regression discontinuity design exploiting the vote-share cutoff at which tax levy renewals pass or fail, comparing local income outcomes just above versus just below the threshold.

### What they found (results)

Using a regression-discontinuity design around the 50%-vote-share threshold for renewing local tax levies, balanced-budget reductions in local taxes and spending caused a large drop in local incomes within the following years (an implied government spending multiplier of about 1.5), with the effect concentrated in lower-income, high-poverty areas consistent with liquidity-constrained households.

## Commentary

### In short

The findings use a sharp boundary in vote share to isolate a causal relationship between locally financed fiscal policy and local income.

**Patterns it shows** D, R

**Added** 2026-09-19

**How to cite this** David M. Brasington, Marios Zachariadis (2026). Fiscal policy and economic activity: new causal evidence. The Scandinavian Journal of Economics.