Does direct democracy reduce public debt? Evidence from Swiss municipalities

Although some countries have managed to obtain balanced budgets or even bud get surpluses in recent times, public debts of many OECD countries remain a t high levels. Since structural reforms of public spending have only infreq uently taken place in most countries, fiscal pressure will increase again i n the future due to society's ageing and the accompanying increases in soci al transfer spending. Constitutional restrictions on debt levels and legal rules of the budgetary process, such as a strong role of the minister of fi nance, are supposed to be helping against the debt bias inherent in politic al decision-making procedures. In addition to such top down budgetary proce dures, this paper investigates the impact of referendum approval of budget deficits by the voters on the level of public debt in a cross section of th e 134 largest Swiss municipalities in 1990.