Strasbourg, 17 September 2009 CDLR(2009)41
Item 6.9 of the agenda
EUROPEAN COMMITTEE ON LOCAL AND REGIONAL DEMOCRACY
(CDLR)
THE IMPACT OF THE ECONOMIC AND FINANCIAL
CRISIS ON LOCAL AND REGIONAL GOVERNMENT:
WHAT POLICY RESPONSES BY GOVERNMENTS?
Secretariat Memorandum
prepared by the Directorate General of
Democracy and Political Affairs
Directorate of Democratic Institutions
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Introduction
This document contains the draft text for the Declaration on the impact of the financial/economic crisis on local and regional government, to be included in the (draft) Utrecht Declaration.
It has been prepared by the Secretariat on the basis of the results of the CDLR Round-table held on 2 September 2009, entitled "The impact of the economic downturn on local government: what is happening and what can be done about it?".
The text of the annex to this draft Declaration (the Guidelines) is taken mainly from document CDLR(2009)29.
Action required
The CDLR is invited to review the draft text for the Declaration with a view to submitting it to the Ministerial Conference for adoption.
Should the CDLR consider more time is needed for this review, it is suggested that the CDLR could instruct the LR-IC Committee to complete the review at its meeting on 12-13 October 2009.
Draft Declaration
on the impact of the financial/economic crisis
on local and regional government
(to be included in the Draft Utrecht Declaration – see doc. CDLR(2009)47)
We the Ministers,
Concerned about the shockwaves the current global economic crisis is sending through all our member States affecting them at all levels and in all sectors;
Having examined the impact of the economic crisis on local government in our member States on the basis of our individual experiences and the document prepared by the European Committee on Local and Regional Democracy in co-operation with the Local Government and Public Service Reform Initiative of the Open Society Institute1;
CONSIDERING THAT
1 the economic crisis is already having a measurable impact on local government in our member States, with both a reduction of revenue and an increase of expenditure causing a budget squeeze;
2 so far, the impact differs significantly within and between countries both in terms of scale and in terms of timing;
3 these differences result from a variety of causes, notably the severity of the downturn, the parallel fortunes and responses of national government, the nature of the local government revenue and its vulnerability to economic change as well as time-lags in taxation systems;
4 unfortunately and notwithstanding signs of recovery in some sectors, the budget squeeze for local government in many cases is likely to get worse before it gets better because cushioning effects will wear off and the full extent of the cost to communities and people to be borne by local authorities will only become apparent in the months and years to come; moreover the increase in social expenditures arising from recession will be exacerbated in the long term by the ageing of European populations;
AGREE THAT
5 we, the European ministers responsible for local and regional government must take responsibility in our areas of competence to mitigate, counter and overcome the impact of the economic crisis;
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1. CDLR(2009)29
AFFIRM THAT
6 the pressure on available resources at all levels further underlines the importance of our common objective of delivering good local and regional governance;
7 to that end local and central government each have their part to play in facing up to, sharing the burden of and overcoming the economic crisis;
8 central governments have a clear responsibility in the resourcing of local authorities;
9 local and regional government can be extremely powerful actors in addressing and overcoming the economic downturn because of their knowledge of communities, people and businesses at local and regional level;
10 whilst the means to be deployed will differ over time and vary from place to place, there will be a constant need for efficient and effective collaboration between all stakeholders - central government, local and regional authorities and their associations - in order to transform the economic crisis from a threat into an opportunity for improvement;
11 exchanging and sharing information and experience at local, regional, national and international level, as well as the identification of good practices this enables, will be key to achieving success at the earliest possible time;
12 any and all action must remain fully compatible with the obligations of member States under the European Charter of Local Self-Government;
COMMIT OURSELVES
As concerns our respective domestic situations:
1 to establish and/or maintain efficient and effective collaboration between all stakeholders - central government, local and regional authorities as well as their associations – and;
2 to make use of the guidelines for policy responses to the impact of the economic crisis on local government appended to this declaration in order to counter, mitigate and overcome the impact of the crisis;
As concerns our co-operation:
3 to develop and make the best possible use of our membership of the Council of Europe to exchange and share information and experience as well as to identify good practices;
4 to contribute to continued collection of financial and policy data and ensure appropriate participation in a review conference to be held in the second half of 2010;
5 to make use of and help develop further the Council of Europe’s capability to organise peer reviews, provide legislative and policy assistance as well as capacity building programmes;
6 to work together on the implementation of the Utrecht Agenda as it appears below;
7 to review the overall situation as regards the impact of and responses to the economic crisis on local government at our 17th session;
INVITE
the Congress and the Parliamentary Assembly to participate in the work to be carried out as set out above;
In view of the wide-ranging nature of the impact of the economic crisis on our member States,
WE FURTHER RECOMMEND
to the Council of Europe as a whole and the Committee of Ministers in particular to reinforce its focus on the quality of governance (good democratic governance) and to establish it as a transversal dimension to guide all intergovernmental activities.
ANNEX
Guidelines for policy responses by central government to the impact of economic downturn on local government
I. General
1. Any policy response by central government to the impact of economic downturn on local government must be fully compatible with its obligations under the European Charter of Local Self-Government (CETS 122);
2. The two recommendations of the Committee of Ministers in the field of local finance, Rec(2004)1 on financial and budgetary management at local and regional levels and Rec(2005)1 on the financial resources of local and regional authorities, offer a powerful and coherent set of guidelines aimed at ensuring a sound local finance system, many of which are ever the more useful in the context of the economic downturn;
3. Whilst the means to be deployed will differ over time and vary from place to place, there will be a constant need for efficient and effective collaboration between the all stakeholders, central government, local and regional authorities as well as their associations in order to transform the economic crisis from a threat into an opportunity for improvement;
4. Exchanging and sharing information and experience at local, regional, national and international level, as well as the identification of good practices this enables, will be key to achieving success at the earliest possible time.
II. Possible policy responses identified so far
The survey of member States carried out in preparation of the 16th Session of the Council of Europe Conference of Ministers responsible for local and regional government has identified five main possible policy responses, which are reviewed below. It is to be stressed that the feasibility and desirability of these options vary from country to country and thus are to be seen a range of policy options and not a prescriptive set of measures.
The five main options identified so far are:
1. Reform of intergovernmental financial relations;
2. Improving accountability and efficiency;
3. Improved targeting of social benefits;
4. Innovative re-design of public services;
5. Enhancing local flexibility and discretion.
Reform of intergovernmental financial relations
It seems logical that levels of government with a high percentage of fixed, recurrent commitments like public employee wages and service maintenance should not depend significantly on volatile revenues such as corporate profits and value added taxes. One can argue, au contraire, that local public services should enjoy their fair share of rising public revenues and equally share the consequences of their decline.
The most lucrative local tax source across Europe is sharing or surcharging of personal income tax. It is the only tax base which is both technically susceptible to variation by local decision and capable of funding a large proportion of the costs of the major educational and social care services.
Access by local government to this base has been expanding. This should continue if major progress in fiscal autonomy is to be made, but accompanied by an adequate system of equalising differences in the tax base and some limits on rates to avoid adverse effects on labour market supply in an increasingly globalised world.
Property is the most common base of autonomous local taxation, (i.e. subject to local rate setting), but a relatively low percentage of local revenue overall. It is unlikely that radical changes in valuation methods will be undertaken, but the political resistance to increased incidence could be countered by greater attention to the link between tax bills and household income. Experience has shown that municipal freedom to apply cautious but regular increases in tax rates in line with, or just ahead of the general rate of inflation, is a necessary condition for maintaining the tax’s significance.
One interesting finding is that the most vulnerable revenue bases have been those relying heavily on a single source, whether own revenue or intergovernmental transfer.
Increasing taxes and charges may ease budget strain and improve the efficiency of utility services, but (as opposed to countercyclical grants) it may restrain consumption and exacerbate recession. Two considerations, however, argue for some restraint. For some kinds of taxation – notably PIT – high tax rates may have long term effects on labour supply. The second is that a number of national laws and policies impose restrictions to ensure that local taxation does not discriminate unfairly between domestic and business payers.
Both the European Union and national governments have adopted measures to accelerate capital investment in “shovel-ready” projects, often with an environmental bias, as part of counter-cyclical policy. Local governments have to be ready to exploit such opportunities quickly, but access to short term credit is frequently necessary to meet pre- and co-financing requirements.
Based on the Council of Europe acquis, the Centre of Expertise of the Council of Europe and OSI/LGI developed a set of benchmarks to assess both the intergovernmental financial relations and the quality of the financial management performed by local authorities. While the benchmarks concerning local financial management proper met with demand and have already been successfully implemented, the ones aimed at helping central governments to assess their policies concerning local finance are yet to raise interest among central governments. These benchmarks could, however, be very useful for governments seeking to understand their strengths and weaknesses and aiming at reforming intergovernmental financial relations in response to the crisis and beyond.
Whatever the short term desirability of restraint, the longer term period of recovery will probably demand increases in local taxes and charges and the Charter’s requirement of local autonomy in this respect should be respected universally.
Improving accountability and efficiency
Cost control
Many attempts by local governments to reduce administrative overheads have been made. Evidence suggests that, justified as these may be, they yield temporary or one-off savings which do not greatly affect longer term efficiency.
Longer term efficiency requires more fundamental examination of the practical ways in which services are run. Several techniques for doing so have been developed, including by the Council of Europe and the Open society Institute.
Benchmarking is one of the tools designed to help the public scrutinise the care with which its money is being used. Another is the Citizens Charter, usually a promise to citizens to deliver services at certain standards and a set of procedures by which they can check its fulfilment.
Performance audit
The current ambitious Strategy for Innovation and Good Governance at Local Level launched by the Council of Europe includes among its implementation measures the development of a European Label of Governance Excellence (ELOGE) which would be attributed in a decentralised manner to municipalities reaching a certain level of quality in their overall governance. Based in particular on a benchmark/measuring tool specifically tailored to the needs of local authorities, the label, if successful (its road test should start in late 2009) could be very effective in supporting the improvement of local governance.
In several countries improvements in efficiency could be promoted by increases in the number of internal and external auditors trained in performance audit and by promotion of greater public interest in their findings.
Removing incentives to expensive service provision
Administrative and financial arrangements frequently encourage local government to provide services in an unnecessarily expensive way. These include fragmentation of responsibility between tiers of local government for services to elderly and infirm clients and perverse incentives in methods of paying service providers.
Reviewing unsustainable norms
Local governments which 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 service and health care in the latter category.
The problem is 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.
Signatories of the European Charter should be ensuring that national ministries do not micro-manage services entrusted to local government whether technically delegated or not.
Delegating institutional management
Delegating budgets and their managements to service institutions is another aspect of New Public Management which is now widespread; per-pupil funding of schools is now widely adopted, for example.
These solutions, though timely in a period of recession, need careful introduction, however. Budget allocations need to take full account of exogenous variations in cost. Population density and social background have major impacts on school expenditure, for example. Audit and other forms of accountability must match degrees of financial delegation.
Territorial re-organisation
Larger municipalities should spend a smaller proportion of their resources on administrative overheads and achieve greater economies of scale. But while amalgamation may enable local authorities to provide a larger range or quality of services, there is no evidence that it saves money overall.
It may be easier to achieve economy by increasing co-operation between municipalities, particularly in the development of large scale infrastructure and the operation of professionally demanding aspects of administration such as taxation and development control.
Improved targeting of social benefits
Means testing the allocation of social benefits is resisted by governments because it is divisive, open to corruption - and plain difficult. But if money is tight, its introduction may be the price of providing assistance to those who are in real poverty.
Innovative re-design of public services
Partnership between local government and non-governmental organisations is common in Europe, aided by the growing numbers of retired people who are still physically fit and potentially active. But there are still countries where NGOS are seen as threats rather than allies, and also where “volunteering” is associated with memories of totalitarian coercion. These attitudes of mind are neither healthy nor affordable. Public funding of public services is not all or nothing and the support of family and community care will need to occupy a place in national and local government provision for a growing population of elderly people.
Enhancing local flexibility and discretion
The downturn has demonstrated the dependence of local fiscal fortunes on differences in national policy. But this should not be exacerbated by a deliberate or instinctive re-centralisation of authority. The responses outlined above call for more local flexibility and discretion, not less. The case for the principles and provisions of the European Charter of Local Self Government remains intact.