Public expenditures and optimal size of municipalities: Analysis of Rio Grande do Sul using a spatial dashboard

Abstract

The size of the municipalities is an important factor in the debate on the efficiency of local public spending. In Brazil, this problem became on the agenda as of the proposal to Constitution number 188 of 2019, which provides for the extinction of municipalities with less than five thousand inhabitants without financial sustainability. The aim of this study is to evaluate the existence of an optimal size for the municipalities that can contribute to the reduction of municipal expenses in Rio Grande do Sul. For this, a dynamic spatial panel of the type Spatial Durbin Model (SDM) and a nonparametric function of the population variable for the period from 2002 to 2017. The results show an association in the “U” shape between the size of the population and municipal public expenditure per capita. The minimum expenditure point is found when the municipality has about 13,000 inhabitants. In addition, an exercise is carried out to distinguish the implications of population size in subsets of public spending.