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Local government finances during the “Great Recession”

A report by the German Marshall Fund of the United States

This report–written by Professor Harold (Hal) Wolman for the German Marshall Fund of the United States –examines how national government policy, and particularly national grant systems, affected local governments during the “Great Recession” and its aftermath, which in many countries consisted of a period of fiscal consolidation designed to cope with a debt/deficit crisis.

The author terms these two events, occurring over a four-year period from late 2007 through 2011, “the economic crisis.” Of particular concern are national government policy toward local governments and whether local government fiscal responses were counter- or pro-cyclical during the period of slow or negative economic growth. In other words, did national government policy promote additional local government spending during the recession (a counter-cyclical policy), or did it encourage reduced sub-national government spending (a pro-cyclical policy)? The paper also examines whether local government fiscal policy was consistent with stated national government policy, and whether and how the imposition of fiscal austerity policy and fiscal consolidation programs at the national level affected local government spending. The author concludes that:

  • Local government fiscal behavior is counter-cyclical in most countries during a recession, though in many cases less so than national government fiscal behavior.
  • Most national governments do attempt to affect local fiscal behavior during periods of recession and/or fiscal consolidation efforts. They do so through increasing grants to sub-national governments during recessions and reducing them during fiscal consolidation. They also do so by strengthening fiscal rules and through the enforcement of those rules during consolidation periods.
  • In general, local fiscal behavior does support the goals of national fiscal policy.
  • During recessionary periods, national government behavior generally mitigates the effect of local government own-source revenue declines to some extent through increased grants. However, during periods of slow economic growth, when national governments pursue fiscal consolidation and austerity, grant reductions expose local governments to the full force of own-source revenue declines.

The first part of the report provides information on all OECD countries for which appropriate data are available.

The second part of the report presents a contextual overview of local government finance in the OECD countries and focuses on six countries for which the author presents additional data and more intensive analysis (Germany, Italy, Poland, Spain, the United Kingdom, and the United States). The overview consists of a set of tables and discussion of the role of local government in the public sector, the extent of local government autonomy in each of the countries, and the functional assignment of responsibility of the various local government systems (who does what?). The six country cases are placed within the broader context of all OECD countries for which relevant data are available. A more complete discussion of the local government context of the six countries is then included.

 

Photo credit: Hamburg City Hall (Roland Geider).