Strasbourg, 17 March 2009                                                                   LR-FS(2009)2

                                                                                                                         

EUROPEAN COMMITTEE ON LOCAL AND REGIONAL DEMOCRACY

(CDLR)

COMMITTEE OF EXPERTS ON LOCAL AND REGIONAL

FINANCE AND PUBLIC SERVICES

(LR-FS)

WORKSHOP ON THE IMPACT OF THE GLOBAL FINANCIAL CRISIS

ON LOCAL AND REGIONAL AUTHORITIES

Secretariat memorandum

Secretariat Memorandum

prepared by the Directorate General of

Democracy and Political Affairs

Directorate of Democratic Institutions

This document is public. It will not be distributed at the meeting. Please bring this copy.

Ce document est public. Il ne sera pas distribué en réunion. Prière de vous munir de cet exemplaire.

 

Introduction

As agreed at the meeting of the LR-GR Committee (the predecessor of the new LR-FS Committee) in October 2008, a workshop on the impact of the global financial crisis on local and regional authorities will take place as part of the Committee meeting. It is scheduled for the afternoon of 6 April 2009, from approximately 3 to 6 pm.

The aim of the workshop, which all members are invited to contribute actively, is (a) to take stock of the impact (so far) of the financial and economic crisis on local and regional government, (b) to consider likely future developments and possible policy responses and (c) to consider a possible activity of the Council of Europe in co-operation with the Local Government and Public Service Reform Initiative (LGI).

As concerns (a) the financial crisis and its impact on local and regional authorities in member States, the CDLR in December 2008 invited member States to participate in a survey, the results of which appear in document LR-FS(2009)3 and will be sent to the CDLR in due course. During the workshop, members of the Committee could, should they so wish, comment on and up-date the information concerning their country, or, in case their country did not take part in the survey, give information with respect to their country.

As concerns (b), Appendix 1 is a “food for thought” paper, prepared by Mr Ken Davey, Emeritus Professor at the University of Birmingham and member of the Local Government and Public Service Reform Initiative (LGI). It identifies likely future impacts of the economic downturn on local government and suggests policy implications and responses. Mr Davey will present this paper at the workshop with a view to having an in-depth discussion of it with members.

Finally, pertaining to (c) and drawing on the issues set out in Appendix 1, Appendix 2 sets out a proposal for a joint activity between the LGI and the Council of Europe that aims to contribute to the 16^th session of the Council of Europe Conference of Ministers responsible for local and regional government (Utrecht, 16-17 November 2009). 

This proposal will be submitted to and decided upon by the CDLR at its meeting on 22-24 April 2009. It will be presented at the workshop with a view to soliciting  members views on it in order to assist the CDLR in arriving at a decision at its meeting in April.

Action required

Members are invited to prepare for active participation in the workshop, along the lines set out above.

The Committee is invited

a.       to take note of any new and additional information members may submit concerning the impact of the financial and economic crisis on local and regional government of their country;

b.       to discuss and arrive at a view on the “food for thought” paper contained in Appendix 1. In particular it is invited to validate and make suggestions concerning the analysis and policy suggestions it contains;

c.       to discuss and to arrive at a view on the proposal set out in Appendix 2. The Committee may also wish to make suggestions for taking the proposed work forward;

d.       to send to the CDLR for consideration the views it has arrived at under b. and c.

APPENDIX 1

LOCAL GOVERNMENT AND THE ECONOMIC DOWNTURN

A “food for thought” paper prepared by Mr Ken DAVEY

1. Overall Impacts

It is too early to predict the exact impact of the economic downturn on local government. It will differ from country to country and from place to place, according to respective economic fortunes and the nature of local revenue bases and responsibilities. Nevertheless, two dominant features are suggested as likely:

• A squeeze on current budgets between a decline in revenue and an increase in social expenditures

• Encouragement to undertake construction and repair projects which are labour intensive and quick to design and execute.

2. Current revenues

The impacts will vary by source, but the following trends are anticipated:

• Yields of  personal income tax shares (the largest single local revenue source in most CEE, SEE and FSU countries) will decline with rising unemployment

• Property tax revenues will be reasonably stable, as assessments are based on formulae ignoring falling values, but the base will be eroded by closures of commercial enterprises and there will be clamour for exemptions

• In those countries where shares of corporate profits tax or VAT are assigned to local governments, these will decline (sharply in the case of CPT)

• National government revenues will fall at a sharper rate than those of local government; this may lead to a cut in grants to local government which are not tied to fixed commitments such as teachers’ salaries.

• Local business taxes will decline where they survive.

3. Current expenditures

There will be a steep rise in the cost of social benefits. This will fall mainly on central government, but depending on country systems local government may bear some of the extra costs of

• Housing allowances (because of falling household incomes or slower reimbursement by central government)

• Safety net payments to the long term unemployed

• Emergency aid to families in advance of awards of state benefits.

4. Capital budgets

Regular sources of investment funding will probably decline. In particular

• Operating surplus will shrink

• The willingness of banks to supply credit or buy bonds will be severely reduced

• Private enterprise will have less capital for PPPs

• The market for asset sales will also shrink

However, there is no sign of any diminution in EU Structural or Pre-Accession funding. Moreover, fiscal stimulus strategies may lead to an enhanced flow of EU or state budget funds for new capital projects or major repairs which

• sustain the construction industry

• are labour intensive

• can be designed and executed  quickly.

5. Policy Implications

Falling revenues and increasing social expenditures may lead to budget deficits or reductions in operating surplus. Because of similar if not worse constraints on state budgets, local government will not be able to gain relief from changes in intergovernmental fiscal relations.

The overriding priority will be to protect essential local public services by making local government expenditure as productive as possible. This could take the following directions

• measures to improve efficiency and reduce inessential overheads, using processes such as benchmarking and performance audit

• reducing the administrative costs and scale diseconomies arising from territorial fragmentation; reconsidering proposals for consolidation of small jurisdictions and increasing the range of inter-municipal co-operation;

• improving the targeting of social expenditures to maximise the benefit to impoverished households and eliminate unnecessary subsidies to those better off;

• relaxation of nationally imposed expenditure norms which restrict local discretion to improve operational efficiency.

At the same time local governments will be under pressure to stimulate flagging local economies, and may well have increased access to investment funds, possibly at short notice. They would be wise to

• improve their awareness of EU structural and pre-accession funding channels

• develop a bank of small scale infrastructural construction and repair projects  which might qualify for  fiscal stimulus funding as and when it  emerges.

Times of crisis are also windows of opportunity, lending urgency to reforms which have previously lacked attention and support. It is increasingly unlikely that previous levels of economic progress will be quickly restored and local governments will need the widest discretion to keep public services at essential levels despite shortage of money. This will not be achieved by tighter national control, but rather by reinforcing the exercise of local power and responsibility envisaged by the European Charter of Local Self Government.

APPENDIX 2

Proposal for a possible joint activity

between the LGI and the Council of Europe

1. The LGI Analysis

In consultation with Council of Europe Secretariat, LGI will commission an analysis of

• the actual impacts of the economic downturn on local budgets in the latter part of 2008 and the first half of 2009 derived from financial reports, national or sample, as they become available

• the feasibility of the four policy options described in paragraph 5 of Appendix 1

• the opportunities for access to investment funding, including prospective changes to  structural fund flows.

The analysis will be undertaken by a small editorial group of international specialists previously associated with LGI and Council of Europe programmes.

This editorial group will work in correspondence with a network of country observers who will be asked to

• collect national or sample data on fiscal outcomes as soon as it becomes available

• comment on the relevance of suggested policy options to their own countries.

These observers will be recruited by LGI within its traditional area of operation in central, eastern and south Eastern Europe. However potential collaboration with specialists in Western Europe will be explored at the Twente Conference.

2. Consultation

The framework of the LGI Analysis will be presented for comment at

• The Twente Conference on Innovation for Good Local and Regional Governance on 2 and 3 April (specifically on the morning of 3 April)

• The meeting of the CDLR Finance Committee (LR-FS) at Strasbourg on 6-7 April

• The CDLR meeting at Strasbourg on 22-24 April.

3. Discussion of Findings

The preliminary results of the analysis will be presented for discussion by a Round Table in early September (in Strasbourg) to which representatives of OECD, World Bank and similar interested organisations will be invited.

Subject to revision in the light of the Round Table discussion, the findings will then be submitted to the CDLR meeting on 21-23 September which will decide their inclusion as a Working Paper in the agenda of the Ministerial Conference at Utrecht on 16-17 November and recommend the appropriate response by the Conference.

4. Further Steps

This initiative is being taken because of the successful experience of collaboration between LGI and the Council of Europe arising from common values and concerns. It is hoped that discussion at Utrecht will suggest directions for more detailed and specific work either regionally or in specific countries which can form the basis for longer term joint working between LGI and the Council of Europe in 2010.