Debt Limit Works. Mayors Respond Before Sanctions Are Imposed.

What makes a mayor keep municipal debt under control? The threat that a municipality may lose part of its tax revenues, or the fear of being publicly labelled fiscally irresponsible? New research by Lucie Sedmihradská and Markéta Arltová from the Faculty of Finance and Accounting at the Prague University of Economics and Business, published in 2026, shows that the second motivation may be surprisingly powerful. 

In 2017, the Act on Budgetary Responsibility Rules entered into force in the Czech Republic. For municipalities, it introduced a clear numerical criterion: the debt of a local government should not exceed 60% of its average annual revenues over the previous four budget years. If a municipality exceeds this threshold, it must reduce its debt in the following year by at least 5% of the difference between its actual debt and the statutory limit. Otherwise, the Ministry of Finance may decide to withhold part of the municipality’s shared tax revenues. 

The law thus created a clear and publicly understandable boundary between “acceptable” and “risky” municipal debt. This visibility turns out to be crucial. The rule did not function only as a technical instrument of fiscal control, but also as a reputational signal towards citizens, the media and political opposition. 

A Natural Experiment Involving 676 Czech Municipalities 

The authors focused on 676 Czech municipalities whose debt ratios between 2015 and 2020 were close to the 60% threshold of average revenues, specifically between 55% and 65%. These municipalities were economically very similar, but differed in one respect: some were just above the limit and were therefore subject to monitoring and the threat of sanctions, while others were just below it. This natural experiment made it possible to compare whether and how municipal behaviour differed on the two sides of the threshold and to observe this behaviour during different phases of the rule’s implementation. 

Before the rule was introduced, the threshold did not exist. In 2015, before the law was adopted, the behaviour of municipalities just above and just below the future limit did not differ significantly. This shows that the 60% threshold was not an economically determined breaking point in itself; its effectiveness depended on how it was perceived by the Ministry of Finance, the public and the media. 

After the law was announced, municipalities reacted even before they were required to do so. Between 2016 and 2017, when it was already known that the limit would come into effect, municipalities just above the threshold began reducing their savings and using them to lower their debt. On average, this amounted to approximately 0.7 percentage points of average revenues. Their aim was to move below the statutory threshold before the rule even began to be formally assessed. 

“Based on our review of the literature, we expected this, but the reality and the strength of the effect still surprised us,” say Lucie Sedmihradská and Markéta Arltová. After the rule entered into force, municipalities just below the limit also began to respond. From 2018 onwards, the research shows that municipalities approaching the threshold from below actively reduced their debt in order to avoid reaching the critical boundary at all. 

Why Does the Rule Work Even When Sanctions Are Not Used? 

The authors explain this through the theory of blame avoidance — that is, the effort to avoid blame and public criticism. For mayors and municipal councillors, the prospect of their municipality appearing on a public list as an example of poor financial management is often more serious than the threat of a financial sanction. 

A similar mechanism operates in Norway, where the ROBEK register lists municipalities that fail to meet balanced-budget requirements. There, too, researchers have found that the fear of being placed on the list motivates municipalities more strongly than formal penalties. 

What Does This Mean for Policymakers? 

The study offers findings that are important for the design of fiscal rules in public administration. Reputational risk and the fear of public criticism can influence the behaviour of municipal leaders earlier, and often more reliably, than formal sanctions. As a result, transparent monitoring combined with public reporting may be a cheaper and, in some cases, more effective alternative to strict sanction-based mechanisms. This is relevant for discussions about the future design of budgetary responsibility rules for municipal self-government. 

The research also made use of an exceptionally suitable methodological opportunity: the adopted legislation created a clear cut-off point that allowed the authors to observe changes in the behaviour of Czech municipalities using a modern quasi-experimental method. It was precisely the combination of a relevant institutional context, available data and an experimental approach that enabled the study to be published in a special issue of a selected academic journal devoted to experimental public finance and budgeting. 

The research by Sedmihradská and Arltová was published in the Journal of Public Budgeting, Accounting & Financial Management in 2026 under the title Behavioral responses to fiscal rules: evidence from Czech municipalities.