A Decade of local finances: two crisis and in between

A Decade of local finances: two crisis and in between

The past decade can be characterised by three major periods of economic growth and public sector development.

(i) 2010-2012 were the years when local governments started to contend with the long-term consequences of the economic crisis. The contracting economy, high general government debt and increased unemployment all severely affected local budgets. The main economic and fiscal policy goals at that time centred on balancing budgets, promoting economic growth while keeping the tax burden low and developing fiscal rules, applicable to subnational budgets as well.

In the European Union, all these actions led to the Stability and Growth Pact and the introduction of new budget surveillance regulations. The introduction of external mechanisms over domestic fiscal policies, such as stronger controls through the European Semester, renewed emphasis on having recourse to excessive deficit procedures and medium-term budgetary frameworks, fiscal council-type independent fiscal institutions, all intended to support balanced development.

The role of subnational governments in balancing general government finances was widely debated during these years; for example, fiscal decentralisation was targeted by the 2012 annual report on public finances in the EMU countries (European Commission, 2012). The report concluded that expenditure-related decentralisation led to a higher primary budget balance; however, the actual impact of fiscal decentralisation was largely dependent on the way in which financing mechanisms were designed. In fact, it was concluded that a greater share of taxes and fees rather than intergovernmental transfers improved budget balances. The local borrowing regulations in place have greater bearing on the balancing of budgets than comprehensive legal requirements.

(ii) Towards the middle of the decade, a gradual recovery was underway despite a stagnating, deflationary economic environment. During this period, new trends in public finances, urban development and public service provision emerged. Economic consolidation was built on new forms of partnership between government tiers. Private sector involvement in public service provision began to decline. Local governments were faced with several new challenges, including the need to search for new approaches to local economic development and growing inequalities that called for an increase in public works programmes, all while working to promote social-territorial cohesion. Urban development goals shifted towards the expansion of public spaces and car-use restrictions, the digitalisation of local administrations and service delivery.

The most important systemic changes occurred in local policies aiming to respond to climate change and to expand local actions for sustainable development. Subnational government policy objectives and priorities have been driven by the Paris Agreement on climate change and the UN Sustainable Development Goals framework, both launched in 2015.

(iii) 2020 marked the beginning of the third period that started with the global outbreak of the COVID-19 pandemic. Following a period of years of fluctuating economic growth, the ensuing lockdown resulted in abrupt changes in all public sector areas. Amidst declining municipal revenue, pressure was high to implement new local actions while taking on broader responsibilities. This “scissors effect” of higher expenditure and loss in revenue forced both national and local governments to introduce new measures. In contrast to how the economic crisis was managed a decade earlier, the national governments and the international financial institutions responded with effective coordinated countercyclical policies, launching intensive stimulus programmes and allocating grants and new loan packages.

The role of local governments in managing the pandemic has differed by country. Policy debates have been more focused on the forms of government interventions and the nature of the State in the future and less on its size and scope of influence. However, the long-term trend of expanding government actions in favour of economic protectionism, social equalisation and environmental safety has visibly begun.

The local fiscal analysis follows this rough classification of the past decade’s three development stages.