A year of REGIO Communities
Publishing 24 June 2021
The European Committee of the Regions published a new study on 'Local and regional finances in the aftermath of COVID-19', conducted by t33 Sound Policy in consortium with CSES (Centre for Strategy & Evaluation Services) and Blomeyer&Sanz.
Local and regional authorities (LRAs) have been at the forefront of COVID-19 crisis management and this has had significant consequences for their budgets. Since LRAs are in charge of some of the most critical elements of public action during this crisis, they have faced a substantial rise in their expenditures, for instance with regards to public health, social services, social benefits, support for SMEs and the self-employed, etc. In the meantime, their revenues have fallen sharply due to a drastic reduction in economic activity as well as tax relief and deferment measures enacted at all levels of government.
This study has analysed this “scissors effect” and its potentially devastating significant and asymmetric impact. This research is a first attempt to quantify the impact of the crisis on LRA revenue and expenditure for the whole EU, for each Member State, and across different sub-national government levels. The report has also analysed why some regions or municipalities have been more affected than others, by reviewing the division of fiscal powers across LRAs for each Member State as well as the impact of the crisis on local economies.
The effect within each Member State has varied significantly across and within subnational government levels. The crisis has impacted less developed areas more. It has particularly affected LRAs with existing financial problems, lacking adequate healthcare facilities and public infrastructure, with more unemployment and poorer citizens. Most urbanised and developed areas, initially heavily impacted, seem to have responded better and show higher resilience to the crisis.
Different ways LRAs are financed throughout Europe (from own resources and state allocations), diverse sources of their revenues and different responsibilities across levels of government have obviously led to different effects on LRA finances. The impact of lockdowns and tax deferrals has varied across and within Member States. The health emergency also interacted with local economic specialisation and the exposure of particular sectors to the crisis. Regions with large manufacturing sectors and higher exposure to international markets have been heavily affected. Metropolitan areas with IT, business services and more jobs that can be done from home, responded better. However, the most affected sector across the EU has been tourism, which is not only a major economic activity but also a key source of revenue for many regions and municipalities.
The report underlines that current pressure on LRA budgets can affect future investments. Pressure on LRA budgets is expected to continue. This could pose significant challenges for LRAs to financially recover and invest in the medium and long-term. For LRAs in less developed areas the costs of the crisis could persist for longer and the territorial investment gap, especially for social protection, education, job creation and improved public infrastructure, could widen between and within Member States.
The report informs the CoR's analytical work on local and regional finances and investment, as well as fiscal decentralisation, and provides useful input for events and workshops in this field. This also contributes to the "division of powers" exercise undertaken by the CoR. It will feed into the political work of the CoR with regards to the crisis recovery and its financing, the economic governance framework (Stability and Growth Pact, European Semester, etc.) and will support its consultative work in economic policy more broadly. The analysis and conclusions drawn are also expected to make a significant contribution to the 2021 "Recovery and Resilience Forum" and to the 2021 edition of the CoR's "Barometer report".