0w2010 01 RESUM EJECUTIVO 03 DEFcarta ang
26/10/10
19:49
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EXECUTIVE SUMMARY 44
United Cities and Local Governments
receipts to central government revenue. This is the case of VAT revenue sharing in Germany and Spain, for example, which makes local budgets sensitive to cyclical fluctuations in central or middle-tier government revenue. If local governments have limited financial room for smoothing transitory budgetary slippages associated with the business cycle, due to a ban on borrowing, for example, revenue sharing may also make local finances pro-cyclical. •
In some countries, local budgets are financed predominantly by transfers and grants from higher levels of administration
This is the case of most Western European countries and a few Eastern European countries, such as Romania and Bulgaria. The United Kingdom stands out among the more populous European countries on the basis of its local governments’ reliance on grants and transfers from the centre. Schemes are in place in many countries to equalize revenue capacity among the local governments (Austria, Denmark, Germany, Sweden, Switzerland). The main consideration is that grants and transfers drive a wedge between the costs and benefits of local provision, which creates disincentives for cost-effective service delivery. To some extent, these disincentives can be mitigated through conditionality. Earmarking is particularly common in the case of grants to finance investment programs. •
The level of local government indebtedness in relation to GDP does not elicit concern about the longer-term sustainability of local public finances in Europe
Low debt positions are due to a large extent, to restrictions on local government borrowing. In most cases, local governments are only allowed to borrow to finance investment (golden rule). Guarantee of local government liabilities by higher-level jurisdictions is often banned.
Restrictions are in place in most countries on the type of collateral allowed in local government debt issuance. In some countries, administrative controls on local government financial management are being replaced by prudential regulations, often based on debt service and loan repayment capacity, as well as on the level of indebtedness in relation to local revenue, as in Bulgaria, Czech Republic, Greece and United Kingdom. Guidelines and recommendations on local government indebtedness are also available from the Council of Europe. Local government indebtedness remains comparatively low in Europe, despite the sharp deterioration in budget positions across the continent as a result of the global crisis and the ensuing recession. This deterioration will call for remedial measures in the form of fiscal retrenchment over the medium-to-longer term, which will also impinge on local governments. The magnitude and timeframe of fiscal consolidation will vary from country to country, depending primarily on the initial level of debt, the size of the stimulus packages put in place in response to the global crisis, and the speed of recovery in economic activity in the coming months.
Conclusions Intergovernmental provisions on service delivery need to recognize the benefits of local self-government. It is important to rely on regulations and norms set by higher levels of government to ensure that minimum standards are met throughout the national territory. But policymakers should make sure that top-down regulations do not curtail their ability to tailor service delivery to local preferences and needs, which may vary across regions, especially in territorially diverse countries. A related issue is that of cost shifting across levels of government, which often arise when top-down regulations impose a financial burden on local budgets.