Local Finance - Report 1/2014 | CDP

Local Finance - Report 1/2014

This report explores the framework that local governments operate in and outlines the main trends of the main aggregates of public finance in the last five years

Local entities, in fact, play an irreplaceable role in the country’s growth. Building infrastructure and delivering local public services are activities that, while typically rooted in a local area, have a significant impact on the development of the country as a whole.

The ability of local governments to stimulate growth and competitiveness in the various geographical areas depends on their capacity to provide sound and efficient management of services and assets.

In the "Report on Local Finance no. 1” of October 2014, CDP noted that the ever-increasing involvement of local administrations in fiscal consolidation has taken place through the introduction of restrictions on expenditure – both current and on capital account – which, while contributing significantly to the process of adjusting the public finances has also ended up hindering the path towards fiscal federalism and infrastructure development in Italy.

Current expenditure

In terms of current expenditure, the need for public-finance consolidation seems to have prompted local governments to pursue essentially linear cuts, rather than to rationalise their resources; in doing so they have therefore preferred to pursue the stabilisation of the public finances rather than the goal of efficient spending.

The analysis conducted on cash-basis figures from Italian regional capitals shows the ineffectiveness of incentives for more efficient spending on intermediate consumption and the emergence of doubts over the achievement of genuine federalism if the tax burden remains unchanged, because of the increase in local taxation in recent years.

Capital expenditure

As for the constraints imposed on the financing of spending on capital account and, in particular, investments, in recent years the stock of local government debt has decreased considerably.

  • Between 2009 and 2013, local government debt decreased by about 6%, compared with an increase in central government debt of nearly 20%
  • At the end of 2013, public debt was over €2,000 billion, of which over €1,900 billion owed by the State and social security and pensions institutions, while just over €100 billion was attributable to the regions, municipalities, provinces and other local entities
  • Also in 2013, local government debt stood at 7% of GDP, at the same level since 2010, while total public debt was around 130% of GDP, up over 15% since 2009
  • Between 2006 and 2013, the capital expenditure of local authorities decreased, in cumulative terms, by 27%, while spending on current account showed an increase of 7%. This trend inevitably had a negative effect on the cash flows of investment expenditure

As a result of these dynamics, many areas of the country have seen a marked deterioration in the quality of infrastructure, whose construction and maintenance is funded almost exclusively by local authorities, with inevitable consequences on the quality of services.

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