Document: The Impact of the Economic Downturn on Local Government in Europe - What Is Happening And What Can Be Done?

How have local budgets fared in the recession? And, more importantly, how are local governments across Europe coping with the prevailing fiscal crisis? What, if anything, can be done to minimise harm to the public services they perform? 

 

These questions are addressed in this updated version of a report presented to ministers responsible for local and regional government at their 16th Council of Europe conference in Utrecht in November 2009. They called for continued monitoring and a review during 2010.

 

This analysis has been prepared by a team convened by the Local Government and Public Service Reform Initiative of the Open Society Foundations (LGI) and the Council of Europe’s Committee on Local and Regional Democracy (CDLR), as part of their established collaboration. It is based on final data for 2009 and a survey of policy responses conducted by observers in member countries.

 

The crisis started in late 2007 with the collapse of overheated housing markets. This undermined banks whose failures and government bailouts dominated 2008. By 2009 these phenomena plunged most European economies into recession. Although 2010 has brought about a weak recovery, the costs of fiscal stimulus programmes, bailouts, and falling revenues have taken a huge toll of national budgets, whose deficits rose from 2.3% of GDP in 2008 to 6.85% in 2009. Inevitably this has subjected local governments to a budget squeeze between falling revenues, threats to state budget support and the rising costs of debt service and social assistance to affected households.

 

The team was greatly assisted by observers in 32 countries who have supplied data on the financial performance of local governments in 2009 and commented on the relevance to their countries of the policy options discussed below.

 

The severity of the squeeze has varied widely, however. It has depended on several variables including:

Allowing for inflation our data on 2009 shows absolute declines in local government revenue (compared to 2008) in 16 countries. Elsewhere revenues are simply growing far more slowly than before. How far this situation will improve and how quickly is far from certain. Threats of a double-dip recession are receding and the sovereign debt crisis so far has not spread beyond Greece. But experience has shown that the worst impact of previous recessions has been felt by local budgets two to three years after general economic recovery as national governments try to restore their own fiscal fortunes and cut back on intergovernmental transfers. Local government is faced with the possibility of this happening again in 2011 or 2012. There is also the likelihood of long-term increases in expenditure arising from the ageing of European populations and measures to combat climate change. There have so far been few, if any, major changes in the structure of local revenue and expenditure, merely temporary ad hoc adjustments. (An exception is Romania where the transfer of competences to local government has been accelerated). For the longer term, recent experience must call into question the major reliance of some South Eastern European local government systems on shares of a highly volatile tax like VAT. In a few cases, national restraint has been imposed on local tax rises, but the general trend has been to ease restrictions on local financial autonomy.

 

More attention has focussed on cutting costs, though in a fairly random and shortterm manner. Pay freezes have been widespread, and even pay cuts. Vacancies have been widely frozen, Serbia has mandated staffing cuts, and Hungary has substantially reduced the number of elected councillors as terms of office expire.

 

More systematic scrutiny of efficiency has not been widespread, although the Council of Europe’s European Label of Governance Excellence aims to promote this. However, Internet publication of items of local budget expenditure is spreading in a number of countries as an agent of transparency and accountability.

 

The crisis has added impetus to municipal amalgamations already in progress in five countries. More widespread has been enhanced co-operation between local authorities in service provision and the sharing of administrative resources and processes. This has generally arisen from local initiative.

 

Cutbacks in services have not been widely reported, but there has been a cull of underutilised institutions, notably small primary schools. In some countries economies have been frustrated by unrealistic service standards rigidly enforced by sectoral ministries.

 

Capital expenditure is normally the first casualty of a fiscal squeeze. This has been averted in the new member states of the European Union, since their enhanced entitlement to structural funds has come on stream over the past two years. Local governments in the old member states have generally benefited from “fiscal stimulus” programmes, funding “shovel ready” projects to sustain employment and the construction industry; these are very limited in scope and duration. Governments have widely relaxed restrictions on borrowing for both cash flow and investment purposes.

 

The rising costs of social assistance, arising both from economic distress and demographic change, call for improved targeting of welfare benefits to the most needy. This has been recognised in some cities or states, but not yet widely. It is bound to command increasing attention as dependency ratios worsen.

 

The suddenness and severity of the fiscal crisis has been a shock because it has interrupted a prolonged period of steady growth in local budget resources. It challenges previous assumptions about the capacity of the state, both national and local, to deliver an indefinite improvement in the scope and standard of public services. To maintain the previous momentum will surely demand higher taxation or greater co-operation with civil society, particularly in the social sector.