Strasbourg, 6 October 2009                                                                LR-IC(2009)13

                                                                          

EUROPEAN COMMITTEE ON LOCAL AND REGIONAL DEMOCRACY

(CDLR)

COMMITTEE OF EXPERTS ON LOCAL AND REGIONAL

GOVERNMENT INSTITUTIONS AND CO-OPERATION

(LR-IC)

GUIDELINES FOR POLICY RESPONSES BY CENTRAL GOVERNMENT

TO THE IMPACT OF ECONOMIC CRISIS ON LOCAL GOVERNMENT

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

This document contains the revised guidelines for policy responses by central government to the impact of economic crisis on local government, such as approved by the CDLR at its 44^th meeting, subject to revision prior to their inclusion in the appendix to the draft Utrecht Declaration.

Action required

The LR-IC members are invited to consider the guidelines and to finalise their wording prior to their inclusion in the appendix to the draft Utrecht Declaration.

 

Guidelines for policy responses by central government to the impact of

economic crisis 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).

2. The two recommendations of the Committee of Ministers in the field of local finance: Rec(2004)1 of the Committee of Ministers to member states on financial and budgetary management at local and regional levels and Rec(2005)1 of the Committee of Ministers to member states 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. The economic crisis has generated a widespread recognition of the need for radical improvements in governance and public expenditure. 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 the stakeholders, central government, local and regional authorities as well as their associations in order to use this opportunity to make the reforms demanded both by the current fiscal situation and longer term social and economic change.

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

Major changes in the distribution of responsibilities and resources between levels of government are unlikely since in most of the countries surveyed the national budgets have suffered more severely than those of local government. Moreover local governments need to retain and develop their competences innovatively to respond to economic and social challenge.

Local revenue bases

Governments and local authority associations might wish to consider changes in those local revenue bases which depend substantially on shares of highly volatile taxes such as those on corporate profits and value added, since these fit precariously with a high percentage of fixed, recurrent commitments like public employee wages and service maintenance.

Personal income 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. In reforming local revenue bases governments may wish to continue expanding the local sharing or surcharging of personal income taxation, a recent trend across Europe. That expansion 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.

Discretion to set local tax rates and charges

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. Local government discretion to set the rates of local taxes and charges should be enhanced in those countries where it is still highly restricted. This applies particularly to the taxation of property. Experience across Europe has shown that cautious but regular increases in tax rates in line with, or just ahead of the general rate of inflation, are a necessary condition for maintaining the tax’s significance.

Control over taxation pressure

Experience of previous recessions suggests that pressure will mount to increase taxes and charges once economic recovery is well in progress. 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.

Benchmarks to assess local finance policies

More attention needs to be given to the set of benchmarks developed by the Council of Europe - Centre of Expertise for Local Government Reform - and OSI/LGI 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.

Improving accountability and efficiency

Cost control

Most effort so far this year has gone into cuts in administrative overheads. These may well be justified, but tend to yield temporary or one-off savings which do not greatly affect longer term efficiency. Governments and local authorities should strive for more fundamental examination of the practical ways in which services are run. These should include several value-for-money and benchmarking techniques which have been developed in individual countries, as also by the Council of Europe and the Open Society Institute. Budgetary information should be readily understandable by the public and open to public scrutiny.

A drive to increase efficiency can be associated with implementation of the Council’s current ambitious Strategy for Innovation and Good Governance at Local Level. Municipalities should be encouraged to seek award of its European Label of Governance Excellence (ELOGE) for reaching a certain level of quality in their overall governance[1].

Performance audit

Both national and local governments should endeavour to train and employ sufficient personnel to apply performance audit, both externally and internally, to all local authorities and their service institutions, and to stimulate public interest in their findings.

Removing incentives to expensive service provision

National and local governments should reform those administrative and financial arrangements which encourage services like health and social care to be provided in an unnecessarily expensive way. Funding norms, for example, should be based on numbers of elderly people, rather than those in residential care.

Reviewing unsustainable norms

Responsibilities delegated to local governments should not be regulated by national governments (and sectoral ministries in particular) in ways that debar local initiatives to make services more efficient. Such regulations often apply to the most expensive services like education and health care, prescribing types and levels of input rather than outcome. Signatories of the European Charter should ensure that national ministries do not micro-manage services entrusted to local government whether technically delegated or not.

Delegating institutional management

Similarly, local governments should so far as possible delegate budgets and their managements to service institutions, so that their directors are encouraged to maximise the use of their resources. In doing so, they should take full account of exogenous variations in cost such as population density and social background in allocating resources between institutions. Audit and other forms of accountability should also match degrees of financial delegation.

Territorial re-organisation

National and local governments should consider territorial reorganisations which might reduce expenditure on administrative overheads and increase economies of scale, particularly in highly fragmented systems of local government. These may well include the types of amalgamation recently undertaken in Denmark and ongoing in Finland.  Alternatively, greater and faster savings along with quality improvements may be achieved simply by encouraging greater co-operation between municipalities, both in operating services and undertaking administrative tasks.

Improved targeting of social benefits

Governments should apply means testing to the allocation of social benefits wherever necessary to ensuring that funds are adequate to increase or sustain assistance to those who are in real poverty. Both national and local governments should also review their benefit procedures to ensure that the poor are not hindered from access by legal and bureaucratic obstacles.

Innovative re-design of public services

Given both the immediate effects of the fiscal crisis and the longer term ageing of European populations, governments should consider redesigning local public services to increase partnership with non-governmental organisations and offer more practical support to care for the aged and infirm provided by families and neighbours.

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. Governments are urged to sustain their respect for the principles and provisions of the European Charter of Local Self Government.