B Explanatory memorandum
by Sir Alan Meale, rapporteur
In 2009, at the peak of the
economic crisis, real gross domestic product (GDP) in the European
Union fell by 4.3%. The same year saw overall unemployment rise
to an average level of 10.2%. According to Eurostat, a slow recovery
pattern began to emerge in 2010 with GDP growth of 2% for the 27
countries of the European Union. However, the growth rate declined
again to 1.5% in 2011 and was predicted to remain at 0% in 2012,
with new real growth only expected for 2013.Note
Unfortunately, whilst the financial
and economic crisis began receding to a greater or lesser extent,
it then turned into a so-called sovereign debt crisis, a situation which
today still overshadows Europe’s politics and economic development.
2. These developments have negative consequences for local and
regional authorities’ budgets and for the public services they are
supposed to provide. For instance, the latter often align their
local tax base too closely on the economic situation of local companies.
Such practices can, in periods of slowdown, cause economic turmoil,
especially when they occur at times of actual cuts in transfers
of finances from national budgets, which often puts at risk the
delivery of quality public services and strains social welfare budgets.
3. Important references in this respect are the revised European
Social Charter (ETS No. 163), which includes provisions concerning
social security and social welfare services, decent living standards,
free primary and secondary education, or adequate housing, and the
European Charter of Local Self-Government (ETS No. 122), which provides
under Article 9 (paragraph 2) that local authorities shall be entitled
to adequate financial resources of their own which shall be commensurate
with the responsibilities provided for by the constitution and the
The precise effect of the economic crisis on local and regional
finances in individual countries needs to be examined more closely.
The question is what new methods or systems have been or can be
introduced nationally and locally to first alleviate, then relieve,
such fiscal stress, whilst, in the long term, strengthening the capacity
of local authorities to respond to the crisis.Note
report focuses in particular on local authorities which are the
government level closest to the citizen and which are responsible
for the provision of various services.
2 Determinants of local budget situations
Local government revenues have
declined in real terms in many European countries which provided data
for 2009-10, for example by 19.7% in Bulgaria, 13.1% in Germany
and 11.3% in Ireland.Note
different determinants of local budget situations are described
in the following chapters. What form intergovernmental actions and
decisions in response to the Europe-wide downturn will take is not
yet known or fully understood. It is, however, certain that some
of the austerity measures applied by European governments since
2009 have had an immediate impact on the budgetary situations of
local and regional authorities, some of which are illustrated below.
It is generally expected that the overall economic prospects will
continue to put local and regional budgets under pressure, even
more so under some of the governmental austerity policies which
were pursued or even reinforced in 2011.Note
Large parts of the following analysis and recommendations
also apply to the situation of regional authorities which are as
much affected by the economic crisis as the local level. However,
their nature and role within national political and administrative
systems vary greatly across Europe. Addressing the specific situation
of different regional authorities would therefore exceed the limits
of the current report. Nevertheless, according to a survey undertaken
by the Assembly of European Regions (AER), regional authorities
consider themselves as being of “great importance for European countries
in fighting the economic crisis”.Note
In February 2012, the European Commission President, Mr José
Manuel Barroso, speaking to the Committee of the Regions (CoR),
stressed the importance of involving regions and cities in current
European Union initiatives, such as those in favour of youth employment
and the development of small and medium-sized enterprises (SME),
and called on national governments to define tailored approaches
with regional and local authorities.Note
It can certainly be said that any
action undertaken by regional governments in favour of economic recovery
and growth could also have positive effects on the situation of
According to figures provided
by Dexia in 2011, own-source and shared tax revenue, being the second largest
source of revenue for the sub-national public sector, continued
to drop by 1.5%, after a previous drop of 4.3% in 2009, a year in
which the economic crisis and counter-cyclical tax measures made
their full impact felt. In 2010, revenues continued to slightly
decline by 0.8%, and drops were in particular recorded in several European
Union countries, such as Germany, Luxembourg, Spain and the United
Kingdom, whilst only few countries saw a rise in tax revenue (such
as Belgium, Denmark, Italy, Finland and France).Note
9. The recession has heightened ongoing concerns about the impact
of local taxes on business enterprises. This has a number of facets.
For instance, if any local authority had based its charges on business profits
or turnover, it may have been highly vulnerable to the general economic
downturn, causing volatility to budgets, which retain the role of
funding recurrent commitments such as teachers’ salaries or road maintenance.
It is therefore important to realise that under such economic conditions,
businesses may consider such fiscal charges and obligations as being
intolerable burdens imposed by local politicians without consideration
of the consequences.
10. Such views have long followed the French taxe professionelle, the country’s
largest local tax source. It was therefore inevitable that the current
recession renewed business pressure for its repeal and the end of
a tax charge based primarily upon asset rental values. In this case,
it ultimately led to its substitution by the cotisation
économique territoriale (CET), which incorporated value
added into its assessment base. This change caused a fundamental
shift in power away from local government, with the result of business
rates now being set nationally. This represents yet another significant
change in local budget situations at a time when social cohesion
costs rapidly increased.
11. There are many other local taxes on businesses which have
been effectively abolished or restricted to ease fiscal burdens
to allow them to survive during the recessionary period. For example,
local taxes on sales periods and other products such as boats will
disappear in Estonia by 2012. Similarly, Irish municipalities have largely
observed national pleas for restraint in property rates. The powers
of Slovak municipalities to set business property tax rates have
been severely restricted, as have Albanian local authorities’ powers
to vary rates of small business taxation.
12. Set against this, there have, of course, been some increases
in local revenue sources during this recessionary period. For example,
in Finland, municipal shares of corporate tax yields have risen
to 32%. Moldova’s motor vehicle tax rate has risen by 30%. Some
54 Croatian local authorities have used enhanced powers to surcharge
personal income tax. A municipal property tax is soon to be levied
in Ukraine. Irish councils have been given the right to tax second
homes and a general property tax was introduced in January 2012.
Finally, the United Kingdom Government has announced its intention
to restore the right of local authorities to retain a portion of
the property tax they collect from businesses, which at present
is merely redistributed on a national per capita basis.
Generally speaking, the only local revenue that has seen an
overall increase by 2% in 2010 is the one linked to local public
service provision, representing a share of 12% of local authorities’
revenues, thanks to the increase of service tariffs and the creation
of new charges.Note
14. Whilst the recession has not
given rise to comparable changes in expenditure assignments, Romania has
proved the exception, where responsibility for the large majority
of their hospitals has been devolved. The State has, however, in
contrast, taken over complete funding of social assistance payments.
Yet another exception is Iceland, where municipalities have recently
taken over the care of its disabled population.
In almost all countries, national
government revenues have been affected more severely than local authorities;
this period quickly worsened with many governments continuing to
find themselves unable to either service or even roll over sovereign
debt or adequately fund local authorities. Once again, figures gathered
by Dexia indicate that grants and subsidies, being the leading source
of revenue for the sub-national public sector, dropped by 1% in
2010. This represented a turnaround from 2009 where governments
had set up substantial aid measures for local authorities as part
of stimulus plans. In 2010, budget-cutting measures taken by central governments
motivated by the public finance crisis led many of them to reduce
or freeze their transfers to the sub-national sector.Note
16. In addition, some governments found themselves unable to resist
the temptation to reduce transfers. One example of this being Serbia,
where in 2010 the parliament amended legislation indexing grants
to their national budget so that municipalities with above average
per capita revenues received less than they would otherwise have
been due, for at least one year. Also last year, the Bulgarian Government
withheld 15% of the grant for delegated functions halfway through
the year. For the rapporteur’s own country, the United Kingdom, the
government’s efforts to reduce their structural public finance deficits
are said to represent in some cases cuts in grants which would reach
12% per annum by 2015.
17. In contrast, some other governments have been more sympathetic
to local budgets, with Austria, Germany, Norway and Spain all providing
short-term funding for small-scale investments designed in particular to
keep their construction industries in business. Several countries,
including Albania, Denmark, Finland, Norway, Poland, the Slovak
Republic and Sweden increased general purpose transfers temporarily
to compensate local authorities for the decline in their tax revenues.
18. However, by 2011, serious doubts developed over a number of
nations’ ability to service or roll over sovereign debt, which led
to grant restraint in countries such as Greece, Ireland, Italy,
Portugal and Spain. Thus causing deliberate and longer term reductions
in transfers in some other countries, such as Romania and the United
Kingdom, which made serious efforts to reduce their structural public
finance deficits. In the United Kingdom, these represented, in some
cases, cuts in grants which will reach 12% per annum by 2015. Thus bearing
out the Organisation for Economic Co-operation and Development's
(OECD) findings that the financial consequences of recession are
felt most severely by local budgets once economic recovery has begun,
when national governments try to repair the damage to their overall
The effect of the recession
on local budgets reflects at least four factors:
- the severity of the downturn;
- the parallel fortunes and responses of national government;
- time lags due to the taxation system;
- the nature of the local revenue base and its vulnerability
to economic change.
20. According to the OECD, revenue from property taxes has been
the least affected by previous economic downturns, personal income
taxes moderately vulnerable, taxation of business turnover more
responsive, with corporate profits being the worst affected.
21. Dramatic falls in housing values might have been expected
to affect revenues from local taxes on property, it being the most
common local tax source in Europe. However, in most European countries,
property taxation is generally based on formula valuations that
are updated very infrequently, which subsequently robs the tax of
buoyancy when times are good, but provides welcome stability during
22. For instance, in the United Kingdom, revenue from the residential
property Council Tax has continued to rise by £1 billion in each
of the last four years, and most other countries also report a rise
in property and land tax yields (for example, in 2009, 25% in Ukraine,
28% in Russia and 23% in the Czech Republic).
23. Property tax receipts are particularly vulnerable in times
of recession, which cause negative pressures, particularly from
business owners. For instance, default reduced Greek yields by 19.5%
in 2009, rural municipalities in Poland granted 32% more individual
rate concessions in 2009. However, in both France and the United
Kingdom, incapacity to pay the tax is effectively compensated by
the government’s hidden subsidies as a response to economic distress.
24. In contrast, local taxes on property sales in many countries
have fallen instantly and dramatically. Previously worth over €8
billion annually in France, their decline has been a particular
blow to the départements (who
are also faced with the major costs of social assistance).
25. Access by local government to personal income taxation varies
across Europe, as does its mechanisms – whether by sharing with
national government or local surcharge, assigned by origin (place
of residence or employment) or by formula. However, regardless of
method, where such access exists the revenue is highly significant
to local budgets (70% of total local revenue in Ukraine, 50% in
Estonia). Personal income tax is also a major resource for large
local governments in the Nordic countries, central Europe and Switzerland.
26. Rising unemployment obviously hits personal income tax revenues,
and those still in a job may earn less through cuts in hours, bonuses
or even wage rates. For example, Slovakian local government revenue
from personal income tax grew by 47% over the four years preceding
the crisis, but declined by 25% in real terms in 2009 and 2010.
Some countries have also reduced rates in an attempt to boost consumption;
maximum rates in Poland had already fallen from 40% to 32%, and
taxable income thresholds have been raised in Hungary. Most dramatically
in Ukraine, where personal income tax accrues entirely to oblast, city and rayon budgets, revenues have fallen
over the last year by over 20% in real terms largely due to wage
27. Similarly, local taxes on business profits or turnover are
isolated and idiosyncratic, with victims often accused of distorting
competition in a global marketplace. These taxes are also highly
vulnerable to economic recession. German local governments are reporting
major declines in the Gewerbesteuer (a
local tax based on company profits), losses reflected in major increases
in municipal overdrafts with local savings banks. Similarly, the
Hungarian Business Tax, levied retrospectively on turnover, has
shown the effects of downturn mainly in 2010. Czech municipalities
experienced a 27% fall in corporate profits tax shares in 2009.
Polish regions received 14.3% less than in 2009. Portugal reports
a reduction in municipal contributions (a surcharge on corporate
profits tax). Russian regions also suffered the biggest drop in
corporate profits tax revenues in 2009, amounting to 70%.
28. Value added taxation is widely shared with local governments
in South-Eastern Europe as compensation for the abolition of the
local sales taxes, prevalent in the former Yugoslavia. Its yields
are directly related to volumes and values of production and commerce,
and are therefore highly vulnerable to their decline. Such shares
represent half of the municipal revenue in Bosnia and yields declined
by 17.5% in 2009 in Republika Srpska.
29. On the other hand, impacts on revenue from fees and charges
are less clear since they are divided between the budgets of local
authorities and their utility companies. Reductions of income from
building permits and other development charges have been widely
reported, particularly in the United Kingdom. Falls in water supply,
sewerage, heating and refuse collection charges have been reported
in Latvia, while in Ukraine only 60% of households are actually
meeting utility charges.
30. Fiscal federalists (predominantly
North American) often attribute great advantage to local fiscal autonomy
measured by the degree of local budget reliance on revenues levied
and collected by local governments themselves. This has not been
borne out by recent European experience. Local budgets financed principally
by either local taxes or intergovernmental transfers have suffered
considerably greater losses than those funded by a balanced mix
of these sources. The vulnerability of individual taxes and transfers
both to economic shocks and changing policies varies so much from
State to State and source to source, that a balanced mix is often
31. Needless to say the recession has provoked debate in many
countries on the necessity of reform of local tax on business profits.
In some countries, the decisions were taken to abolish local taxes
on some businesses to ease fiscal burdens. Nevertheless, in some
European countries there have been increases in local revenue sources.
As national government revenues were affected at first by the crisis,
many countries reduced transfers to municipalities. The European
experience has shown that a balanced mix of financing of local budgets
by local taxes and intergovernmental transfers is much more reliable
during the crisis period.
32. Making the most of more limited
resources is an ongoing challenge. Reports reveal many attempts
to improve the efficiency and effectiveness of local government
33. Comprehensive approaches – top-down, bottom-up – have been
undertaken by two of the countries most severely affected by the
recession, Ireland and Iceland. The Irish Government has orchestrated
root and branch reforms including scale economies through reallocation
and sharing of service provision and administrative processes, efficiency
savings based on benchmarking worth €500 million, wage cuts, recruitment
freezes, and crackdowns on tax evasion. The City of Reykjavik, faced
with a 20% revenue loss over two years, imposed progressive wage
cuts on senior staff, a recruitment freeze, 300 efficiency improvements
based on Internet suggestions by staff, and co-operation with commercial
and voluntary bodies.
In many countries, a strong decrease in local investment (representing
about 15% of local expenses) was observed in 2010, notably concerning
subsidies to third parties and expenses linked to local equipment: direct
investment in particular, representing more that 60% of public investment
at local level, fell by 7.2% whilst it had still been stimulated
in 2009 for the purpose of fostering economic recovery.Note
despite a context of continuous economic crisis and budgetary constraints,
the first positive signs could be seen in 2011 when local investment
started increasing again. This evolution is much welcomed by many
experts who consider that local authorities, even in uncertain economic
situations, must continue to make investments which are important
for the long-term development of their communities.
35. Other methods of tightening belts have been widespread, but
sporadic and rarely strategic. Some of them are categorised below.
The recession has meant some
drastic reductions in staff and salaries. Irish local authorities
have shed 6 000 jobs over the last three years; Danish municipal
establishments were cut by 2.6% in 2009. The Ukrainian Government
has set a target of cutting public sector employment by 20% overall.
In many countries, these trends affect women more heavily than men,
given that they account for higher percentages of public sector employment
(two thirds in the United Kingdom) and also rely to a greater extent
on public services and financial assistance. Because they are poorer
and live longer than men, women will also be disproportionally affected by
reductions in services to the elderly.Note
37. Since 2009, recruitment freezes have been widespread. For
instance, Serbia legislated to impose a ceiling of four municipal
staff per 1 000 inhabitants; a number of municipalities have evaded
this by making staff redundant and then outsourcing their former
duties to them.
38. Many other States or individual authorities have tried to
avoid redundancies, partly because of the cost of compensation and
partly to avoid making the recession worse. Alternatives of pay
freezes or cuts have been widely adopted. Pay in Estonia and Latvia
is down by 15%, and in Spain by 5%. The Greek Government has cut
both pay and bonuses, while Hungary withheld 13th month payments
in both 2009 and 2010, except for the lowest paid staff. The same
progressive approach has been adopted in Portugal where cuts have
been imposed on all staff earning more than €1 500, the size of
the cut rising with salary up to a maximum of 10%. Czech municipalities
were also set a financial target for retrenchment with the option
of cutting pay or numbers. Latvia
has not cut numbers but has instead reduced the working week to
four days, while Icelandic municipalities have cut both hours and
39. Elected officials have not entirely avoided such sacrifices
either. The Slovak Parliament legislated a cut in mayoral salaries,
and when Hungarian local council terms expired in 2010, membership
was reduced by 30%-40%.
40. As governments have tried to restore the longer term viability
of public finance, the related issue of pension rights has come
to the fore. Faced with growing longevity, reforms are addressing
three aspects, the level of contribution to pension funds, the age
of pensionable retirement and the basis of assessment. Proposals
normally cover national and local government alike. The French Government
forced modest changes through parliament in 2010 against trade union
resistance; more radical changes await legislation in Greece, Portugal,
Spain and the United Kingdom.
41. Country observers’ reports
detail many efforts by individual local governments to reduce costs.
These mainly apply to administrative overheads and include cuts
in overtime, bonuses, entertainment expenses and telephone usage,
while purchases of vehicles and furniture have been frozen. In the
case of Romania some of these have been mandated by efficiency measures
agreed with the European Union as conditions for national budget
support. In Serbia, GPS systems have been fitted in municipal vehicles
both to help drivers and let town halls know where they are.
42. Such temporary or one-off savings do not greatly affect longer
term efficiency, which require more fundamental examination of the
practical ways in which services are run, the subject of “value
for money” approaches and performance audit systems developed over
the last three decades being examples of this.
43. The Council of Europe has for some time been helping to develop
performance management capacity in a number of countries such as
Bulgaria, the Russian Federation and Serbia, and in particular has encouraged
the development of French initiatives.
44. A key to many service cost savings has been computerisation.
For example, from 2012 public applications to Danish municipalities
will have to be online. A further example is the United Kingdom,
where public library users record books borrowed and returned on
the library terminal.
45. A less formal approach to curbing excessive costs has been
adopted by a variety of local governments from Greece to the United
Kingdom, which publish details of all items of expenditure over
a fixed limit on the Internet for scrutiny by zealous media. Slovak
municipalities are also now compelled to conduct procurement by
online auctioning (which have resulted in price reductions estimated
46. The economic crisis has forced all countries to tighten their
belts using different methods of cost cutting: from reduction of
staff and salaries to pay freezes. The revision of pension rights
with the aim of increasing the level of contribution to pension
funds and the age of retirement has also been considered in many
countries as a way to save costs for public budgets. The current
financial downturn also emphasises the need for the development
of performance management capacity. Many local administrations have
now started to use computerisation for cost savings of local budgets.
Finally, the mechanisms of financial monitoring, the obligation
for transparency and communication, as well as the standards for
budgetary discipline which are imposed on local authorities in a
given national context, are expected to be reinforced across Europe.
In this respect, a modern governance of public finances must better
co-ordinate national and local policies and associate local authorities
wherever they are concerned by national reform programmes or austerity
48. Local government’s social responsibilities
are under both short and long-term pressure, which has been estimated
as an area of expenditure which will keep on growing.
Brought on by a mortgage market crisis, recession has left
a legacy of unemployment, homelessness and declining household income.
The demands these make on local budgets vary greatly between European States
according to the distribution of responsibility between central
government, social security funds and local authorities for safety-net
benefits and housing subsidies. Depending on country systems, local government
may bear some of the extra costs of:
- housing and utility allowances;
- safety-net payments to the long-term unemployed and others
eligible for minimum income guarantees;
- emergency aid to families in advance of awards of State
50. In 2010, such costs to local budgets rose by 10% in Denmark,
22% in Hungary and 24.5% in the Slovak Republic.
51. Such extra burdens are not necessarily permanent, although
historically levels of employment recover more slowly than GDP.
However, lasting and growing costs arise from demographic trends
which will by 2050 increase the percentage of the population over
65 by half. In much of Europe the burden of care will fall on declining
numbers within the normal working age group.
52. Local government can mitigate
such costs by targeting more of the benefits to low income households.
53. Currently, in many Council of Europe member States, social
benefits are frequently distributed without regard to financial
circumstances. For instance, all British pensioners automatically
receive a winter fuel allowance of £200, without application. In
Lithuania, 64% of social assistance expenditure is on universal benefits,
notably child allowances. In the countries of the former Soviet
Union, numerous allowances or free services are provided to various
categories of “veteran” (of war, labour, natural catastrophes, etc.).
54. The current crisis has begun to promote efforts to target
benefits more precisely. For instance, some Romanian cities, including
Bucharest, have abolished subsidies to heating companies, replacing
them with means-tested subsidies to individual consumers. Chişinău
has started to means test public transport subsidies.
55. Demographic trends call for
fundamental changes in the balance of provision of long-term care
for the elderly, a field in which local government has a prime role
in management and funding. Mention has already been made of the
need to remove any institutional or financial bias towards residential
care, which is generally more expensive and often less sympathetic
than community care.
56. However, helping elderly people stay longer in their own homes
requires greater support to family and voluntary carers. In several
countries, the elderly are now eligible for cash allowances towards
the costs of daily living, which are graduated by degrees of dependence,
but can be flexibly used to buy support most needed from anyone
able to provide it. Public funds can reimburse a range of financial
costs from the loss of earnings by a relative who has to cut hours
to provide care, to the petrol expenses of taking a neighbour to
the clinic or supermarket.
57. The present crisis has encouraged
a cut in underutilised service institutions. Bulgaria, Hungary,
the Republic of Moldova, Romania and the United Kingdom all report
such measures, with small rural schools the most common target.
In many cases, the recession has provided the opportunity to introduce
changes provoked by demographic change.
58. For example, in a number of countries, such as Hungary and
Ukraine, the responsibility for residential care for the elderly
and infirm and hospital care lie with upper tiers of local government,
while the municipalities provide domiciliary and primary health
care. The funding of the upper tier service may well be based on formulae
including the numbers housed or treated. These arrangements may
well provide strong incentives to place social service clients in
residential homes or patients in hospitals when it may be neither
the most appropriate nor sympathetic response to their needs. In
most cases, it is the more expensive solution.
59. Other examples of excessive social sector costs abound. Schools
with declining pupil populations, for example, frequently retain
previous numbers of teaching staff while mandated contact hours
with pupils are generally low.
60. Local authorities who would like to cut costs are frequently
debarred by national regulation. This applies particularly in countries
which distinguish between the “autonomous” and “delegated” tasks
of local government and place the more expensive services like education,
social services and health care in the latter category.
61. Delegated services are often regulated by detailed standards
of provision and local government management is subject to close
supervision by sectoral ministries. These norms typically govern
inputs, rather than outcomes. Ukrainian local governments cannot
close grossly underutilised schools or social and cultural institutions
without the permission of national ministries, and this is frequently
withheld. Such institutions may well no longer be frequented due
to changes in population or public preference.
62. Problems are typically exacerbated by the fact that the sectoral
ministries concerned are not faced with the consequences of running
uneconomic services, since the financing of delegated services is
usually governed solely by the Ministry of Finance. Several national
rapporteurs comment that failure to meet unsustainable service standards
is widespread but tolerated. Others identify national insistence
on observing the norms as a serious problem. Signatories of the
revised European Social Charter should be ensuring that national
ministries do not micro-manage services entrusted to local government,
whether technically delegated or not.
63. Care of the elderly is only
one of a number of areas of social responsibility in which local
governments increasingly co-operate with third sector partners,
from social enterprises to non-profit charities and individual volunteers.
This reflects both demand and supply, the latter enhanced by the
increasing fitness and energy of newly retired people.
64. There is anecdotal evidence, however, that the effects of
the cuts in local budget expenditures are falling disproportionately
on third-sector partners. There are at least two reasons for this.
Firstly, the services which such partnerships provide are often
discretionary and less regulated by mandatory standards. Secondly, reducing
such expenditure does not involve the redundancy costs of firing
65. This can be unfortunate if the principal beneficiaries of
such services are the more vulnerable households. Early childhood
development programmes prepare children from low income or migrant
families for formal education. Kindergartens and after-school clubs
enable low-income mothers to ensure their families’ income. Third-sector
partners provide a lot of care for the disabled. Giving priority
to the support of public employees and mandatory services can have
damaging repercussions for the needs of the most vulnerable and
for social cohesion, dangers to which the Commissioner for Human
Rights drew graphic attention at the International Conference on
Local Government: Responses to Recession Across Europe (Strasbourg,
11 October 2010).
66. Local governments bear the main responsibility for providing
social services, especially housing, health and childcare and aid
to those on a low income. In a situation of recession, local governments
should give increasing priority to targeting social benefits to
the needs of the low-income population. It is important to avoid any
cuts in local budget expenditures on early childhood development
or support to community care. Partnership between local government,
private and social enterprise and voluntary organisations is essential in
addressing social deprivation and promoting social cohesion.
67. If experience from recessions
in the 1980s and 1990s encouraged expectations that local governments would
lead effective partnerships with business and civil society in promoting
economic recovery, it is not to be expected today.
68. Capital is harder to mobilise, with banks seeking to rebuild
their own reserves and avoid risks. Budget squeezes have depleted
the operating surplus with which many municipalities invested in
new infrastructure. Neglect of technical education has frequently
led to a shortage of relevant skills, such as the engineering capacity
needed to develop renewable energy. In addition, competition is
69. The property market boom which favoured urban regeneration
projects has collapsed. Rising fuel prices are challenging the economics
of moving everything from electronic components to Mother's Day
flowers halfway around the world. Some Green movements argue that
local strategies should focus on restoring self-sufficiency rather
than on distribution “parks” close to motorways.
70. Not every aftermath of recession is negative. For example,
interest rates are low and construction prices competitive. For
new member States and candidate countries, the 2007-13 flow of European
Union investment funds came on stream just when other sources were
drying up. Difficulties in providing pre-finance and matching funds
have been widely overcome.
In view of the above, we may
consider that local government faces four longer term challenges:
- the growing demand for care
of the elderly;
- threats to social cohesion exacerbated by the recent recession;
- the costs of an over-elaborate structure;
- the need to rediscover and foster local economic advantage
in an age of globalised competition and rising energy costs.
72. The situation of local and
regional authorities has become critical in recent years as they
are directly in the front line on local issues, such as business
closures, unemployment and social problems.
73. There are clearly several countries, chiefly in Scandinavia
and central Europe, where economic recovery is well under way and
local government finances are back on track. Sadly, this picture
is far from universal. There are other States which are still in
recession or desperate to sustain their sovereign debt and there
is a third category of States like Romania and the United Kingdom
with a strategic policy of achieving a long-term reduction in public
sector deficits which involve cutting transfers.
74. Local self-government has been affected in conflicting ways.
On the one hand, fiscal policy has generally reduced local determination
of tax levels. On the other, national regulation of expenditures
has been partially relaxed in many but not all countries, simply
because national governments cannot fund new mandates and do not
claim to know what is best for local authorities to do in times
of financial hardship.
75. It must also be recognised that local and regional authorities
act as seedbeds for job creation activities.
Accordingly, this report:
- recommends lessening the dependence
of local budgets on highly volatile tax bases such as corporate profits
and property transactions;
- welcomes the increased effort being made to assess and
collect property taxes, and recommends giving local authorities
discretion to set their rates where this is not currently the case;
- notes the greater resilience of local revenue bases with
a balanced mix of local taxes and intergovernmental transfers;
- recommends that local governments be given a year or more’s
notice of any unavoidable reductions of intergovernmental transfers
so that they are able to plan how they can best be absorbed. Cuts
should be distributed by objective formulae to ensure their equity
and political neutrality;
- urges that municipal budget autonomy should be exercised
within regulated limits as regards borrowing, and procedures be
put in place to manage cases of insolvency;
- endorses the efforts of many local governments to reduce
employment costs by means other than redundancies;
- encourages the development of outsourcing local service
provision to the private and voluntary sectors;
- underlines the importance of benchmarking and performance
audit, improved accountability as well as transparent publication
of financial accounts, and endorses the support being given to these
processes by the Council of Europe’s Centre of Expertise for Local
- notes that the crisis has encouraged the optimisation
of local service networks, but recommends that these be accompanied
by measures to avoid aggravating access by people living in rural
areas and vulnerable groups;
- recommends that the administration of social benefits
by local governments give increasing priority to the needs of low-income
- urges avoiding disproportionate cuts in local budget expenditure
on discretionary services like early childhood development or support
to community-based organisations which are important in maintaining social
cohesion and protecting human rights;
- recommends removing administrative and financial incentives
to providing institutional rather than community care for the sick
and elderly, and strengthening support, both practical and financial,
to those who care for them in their own homes;
- stresses the increasing importance of partnerships between
local governments and businesses, educational and research institutions
and civil society organisations in countering social deprivation, caring
for the growing numbers of elderly people and identifying and promoting
potential paths of economic recovery;
- encourages efforts to promote transparency and efficiency
in all aspects of local governance.