The role of intergovernmental aid in defining fiscal sustainability at the sub-national level

The concept of fiscal sustainability has become increasingly used over the last 20 years. However, much of the literature on fiscal sustainability at the sub-national level ignores the role of intergovernmental fiscal relations. To address this gap, this paper discusses a sufficient condition for sub-national fiscal sustainability and examines the importance of intergovernmental aid in determining that sustainability. Using panel data of counties and municipalities in the US, and using unit root and cointegration analytic techniques, this paper finds different levels of fiscal sustainability between counties and municipalities. We also find that intergovernmental aid plays an important role for fiscal sustainability for both counties and municipalities.