Objectives and methodology

Objectives and methodology

This report on local finances aims to provide an analysis and an explanatory synthesis of the developments in subnational finances in the CEMR member countries over the past decade (2010-2020). In this respect, it can be seen as a follow-up to the Dexia-CEMR publication on “Subnational public finance in the European Union”, which covers the early years of the decade (Dexia-CEMR, 2012). The present report takes stock of the trends in subnational finances dating from 2010, the first year following the peak of the economic crisis. It also evaluates the recovery period, along with various financial and service management challenges, and culminates with the outbreak of the COVID-19 pandemic in 2020.

In addition to these core focal points, the analysis also sets out to evaluate the climate change-related aspects of local finances. Cities and regions play a decisive role in managing climate change-related public tasks. They are responsible for a wide range of services that influence adaptation and have regulatory powers that can promote the green transition. Sustainable development and adaptation to climate change have very much been the focus of current local and regional government policymaking. It has primarily been local capital spending targeting green investments, but municipal service management methods have also focused on contributing to decarbonisation and climate crisis mitigation. Only limited information was available regarding these aspects of local finances. However, cases compiled from selected CEMR member countries and a review of the national Recovery and Resilience Facility plans supplement the fiscal analysis.

The CEMR member countries taking part in this analysis represent a rather diverse group. It should be noted that it is not only the scope and forms of decentralisation of these 41 entities that are diverse, but that there are differences in the types of comparable statistical information and financial data available for the period under study. The quantitative analysis is based on the data reported to various international organisations. The sources used for the fiscal and statistical data are specified in Annex 1.

Some limited qualitative information on the factors driving the changes in local finances was also collected from additional sources. It comprises country reports and comprehensive studies by international organisations on key topics relating to fiscal decentralisation and crisis management. Finally, local and regional government associations from seven CEMR countries were invited to respond to a questionnaire. They kindly provided information and some case studies on municipal finances and local climate change actions.

Scope and structure of the report

To facilitate any comparisons, this analysis follows the structure of the earlier Dexia-CEMR report on local government finances. It focuses on five key areas that are determinative of the direction of municipal finances and intergovernmental fiscal relations. For added perspective, a brief assessment of selected public financial management issues is also presented. Along with the fiscal analysis, the European Union’s Recovery and Resilience Facility itself is evaluated, primarily from the point of view of local government.

The fiscal analysis starts off with two critical input factors that influence local finances: 1) the overall economic environment and 2) the forms and trends of territorial decentralisation. These in turn shape four key areas of local government finances, namely 3) budget expenditure (assessed by economic spending category and function), 4) the composition of budge revenue and the crucial area of 5) subnational borrowing and debt. As the past decade has highlighted the importance of financial management methods, a few measurable aspects of 6) Public Financial Management are presented as well (See summary Table 1).

The overarching line of enquiry of this study is to analyse the impact of detectable changes, particularly on a) environmental expenditure influencing climate and green development; b) the efficiency of local finances and c) equity in financing local governments. The last two analytical questions assessing efficiency and fairness issues will be necessarily limited owing to the national aggregate-type data.