We estimate a spatial autoregressive dynamic panel data model, using information on 5,564 Italian municipalities over the period 2001-2011, exploiting their border contiguity as a measure of spatial neighborhood. We find a positive and statistically significant effect of neighboring expenditures on total, capital and current expenditures of a given municipality. We do not find any evidence of yardstick competition when we take account of political effects, while we do find a negative relationship between spatial interaction and the size of the municipality for current expenditure. Thus, we conclude that spillover effects drive the strategic interaction.