Affordable Access

A Note on an "Explosive" Law

Authors
Disciplines
  • Economics

Abstract

A NOTE ON AN “EXPLOSIVE” LAW A NOTE ON AN “EXPLOSIVE” LAW* António S. Pinto Barbosa** According to the provisions laid down in para- graph 3 of Article 24 of the Local Finance Law, of 6 August 1998: “Annual charges with amortization and inter- est payments of medium and long-term loans, in- cluding debenture loans, shall not exceed the high- est limit of the value corresponding to three twelfths of the Municipal General Fund and the Municipal Cohesion Fund assigned to the munici- pality or to 20% of the investment expenditure of the municipality in the previous year.” Is this law strict enough to discipline the in- debtedness of local authorities? Or, on the con- trary, unlimited and unsustainable indebtedness may possibly result despite strict compliance with the law? By examining the limits of indiscipline permitted by law, it will be shown that the latter applies.(1) For this purpose we shall analyse the ex- treme behaviour of a local authority with unlim- ited propensity for spending, and at the same time, for financing such expenditure exclusively through borrowing, always, of course, within the limits permitted by law. Thus, let us consider a local authority that fi- nances its investment exclusively through debt, where Kt is the debt stock (and, assuming equiva- lent amortization, also the capital stock) in t. Sup- pose that the value corresponding to three twelfths of the Municipal General Fund and the Municipal Cohesion Fund assigned to the munici- pality is low, so that the second limit mentioned in the law is relevant.(2) In this case we have: � �i K It t� �� �� 1 102. (1) where i and � are the interest rate and the amorti- zation rate applicable to the debt, while I t repre- sents the gross additional indebtedness, in the pe- riod. The left side of (1) thus represents the debt service, while the right side represents the limit set by law. On the other hand, we have the relation- ship, � �K I Kt t t� � � �1 1� . (2) Using (2) in (1) we obtain � � � �i K K Kt

There are no comments yet on this publication. Be the first to share your thoughts.

Statistics

Seen <100 times
0 Comments

More articles like this

Law notes.

on The International journal of r... 1997

Law notes.

on The International journal of r... 1991

Law notes.

on The International journal of r... 1997

Note on 'Fechner's Law'.

on The Journal of Physiology Mar 12, 1878
More articles like this..