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About this book

This book is based upon a comparative public administration research project, initiated by the Hertie School of Governance (Germany) and the Bertelsmann Foundation (Germany) and supported by a network of researchers from many EU countries. It analyzes both the regimes and the practices of local fiscal regulation in 21 European countries.
The book brings together key findings of this research project. The regulatory discussion is not limited to the prominent issue of fiscal rules but focuses on every component of regulation. Beyond this, the book covers affiliated topics such as the impact of regulation for local governments, evolution of regulation, administrative costs and crisis prevention. The various book chapters throughout provide a broad picture of local public finance regulation in theory and in practice, using different theoretical and national lenses for the analysis. Furthermore, the authors investigate the effects of budgetary constraints and higher-level regulatory efforts on local governments and on democracy and public services in every European country. This book fills a gap with respect to the lack of discussion on local government finance from an international, comparative perspective and, in particular, the regulation of local public finance. With its mix of authors, this book will be useful for practitioners as well as for scholars and for theory-driven research.

Table of Contents

Frontmatter

Introduction: The Relevance and Conceptualisation of Local Finance Regulatory Regimes

Abstract
Although local governments are essential providers of public services and infrastructure across Europe, they ultimately depend on funding from higher levels of government. The clear relevance of local government finances necessitates effective regulation in order to ensure financial sustainability, but as of yet there has been hardly any comparative research regarding this particular topic. The 18 chapters contained in this volume bring together the work of 40 experts in the disciplines of political science, economics, and public administration research to approach the subject of local financial regulation in various scales and contexts across Europe. In this introductory chapter, we first outline key concepts such as fiscal decentralisation and regulation and briefly describe associated underlying theories and research. Secondly, we present comparative fiscal data to demonstrate the variance and trends of fiscal decentralisation across Europe. It also introduces the concept and components of regulatory regimes and develops the argument, that the effectiveness and outcome of fiscal regulation depends not only on the quality of individual components but also on the interactions of those components. We finally present the three guiding questions of this volume and provide a short overview of the chapters to follow.
René Geissler, Gerhard Hammerschmid, Christian Raffer

Concepts of Regulation

Frontmatter

Budget Institutions for Subnational Fiscal Discipline: Local Fiscal Rules in Post-Crisis EU Countries

Abstract
Fiscal rules are institutional constraints on budget policymakers’ decision-making discretion aimed at fostering prudent fiscal policy, promoting overall fiscal discipline, and ensuring long-term fiscal sustainability. Since the European sovereign debt crisis, fiscal rules have been at the centre of the debate on the EU’s economic governance, the need to strengthen fiscal frameworks and improve policy co-ordination. This chapter outlines the origin, purpose, design, and coverage of local fiscal rules in EU countries over a decade after the 2008 financial crash. It presents a review of the empirical evidence on subnational fiscal rules and their impact and effectiveness on fiscal outcomes. The chapter ends with some concluding remarks and lessons drawn from the experience of fiscal rules across both time and space and outlines how policymakers can learn from this international experience.
Gerard Turley, Christian Raffer, Stephen McNena

Fiscal Rules at the Local Level: The Challenge of Enforcement

Abstract
Despite the growing significance of fiscal rules, there is little research about tools and practices of enforcement at the local level. Addressing this knowledge gap, this chapter makes three contributions: first, we review the literature on regulatory enforcement in the ‘public-to-private’ context and discuss six key insights. Second, we provide an empirical overview of enforcement instruments across 21 European countries and discuss them in light of those key insights. Third, we present findings from an in-depth over-time analysis of enforcement practices in Germany’s largest state, North Rhine-Westphalia. We find that European supervisory bodies have a range of instruments that broadly follow the logic of the ‘enforcement pyramid’ at their disposal, but there is substantial cross-national variation in the instruments used. The case study reveals a ‘back and forth’ enforcement style alternating between strengthening and loosening rules and enforcement measures. We find political logics, regulators’ capacities and economic contexts as key drivers. Finally, we conclude that the idea of enforcement as a rational application of legal norms is unrealistic. In order to increase compliance, regulators should make more of an effort to understand the underlying rationale for compliance and violations; they need to secure political support and a credible strategy for escalating sanctions in case of non-compliance.
René Geissler, Kai Wegrich

Financial Supervision of Local Governments: An Organisational Hurdle

Abstract
There is a general consensus on the effects of bureaucratic structures on task implementation and performance. Nonetheless, there has been very little research in the field of local public finance regulation. This article analyses the question of organisational structure in the field of local public finance regulation by surveying 18 European countries. We present five organisational dimensions, which potentially relate to regulatory outputs, and analyse their relation to four fiscal indicators. Those organisational dimensions are (1) the department owning the task of fiscal oversight, (2) centralised or decentralised implementation, (3) implementation in the form of one concentrated or several deconcentrated (regionalised) administrative units, (4) involvement of audit court(s) and (5) task execution by higher local government tiers. This analysis carefully demonstrates whether fiscal performance is somewhat more difficult for some organisational structures than for others. The number of countries per dimension shows that in the field of local public finance regulation, some options are more likely than other ones. Moreover, our results indicate that those organisational categories, such as “task ownership” and the involvement of “audit courts” link to higher financial performance. These results can help practitioners at the respective government levels to reconsider given bureaucratic structures.
Falk Ebinger, René Geissler

European Patterns of Local Government Fiscal Regulation

Abstract
European countries employ heterogeneous and complex systems to regulate local government budgets. Although the topic has become increasingly relevant in the face of past and future economic and budgetary crises, there is a lack of cross-country studies in this field, due in part to the institutional complexity of financial regulatory systems. With the help of extensive case study data processed with quantitative comparative analysis, we conduct a classification study which suggests a new way to analyse the commonalities in fiscal supervision structures, supervision routines and numerical fiscal rules in 21 European countries. In addition, we derive an aggregate index of regulatory strength. This allows us to identify a European north-southeast divide with looser regulatory regimes in the north. Such a pattern fits with existing theories of state traditions and might serve as useful heuristic for future debates about local government fiscal regulation.
Christian Raffer, Andrés Ponce

Local Public Finance Regulation in Southeast Europe: A Comparison of Slovenia, Croatia and Serbia

Abstract
Local public finance regulation differs among countries. The intention of this chapter is to compare current regulatory systems, uncover similarities and differences and provide some cautious explanations on developments. As example, three Southeast European countries—Slovenia, Croatia and Serbia—will be analysed. These countries share a similar history. However, their local public finance regulation developed in different directions, with different reform efforts and different budget constraints. This chapter investigates the regulatory regimes of local public finance, tries to explain the paths these three countries followed and examines the ensuing results. It starts with a description of local government structure and local government finance, followed by a comparison of fiscal rules and supervision. These three countries are still more similar than some of them would like to admit. This holds true especially when it comes to the availability of reliable statistical data, hesitation in substantially reforming their local government systems, simplifying financing and raising local government autonomy. Referring to local government public finance itself, Croatia and Slovenia have stricter regulations than Serbia, as EU accession served as a driver for the quality of fiscal governance.
Mihaela Bronić, Jelena Jerinić, Maja Klun, Katarina Ott, Iztok Rakar

The Impact of Fiscal Rules on the Financial Management of Municipalities: A Comparative Analysis of the Czech Republic and Slovakia

Abstract
This chapter explores the impact of fiscal rules on the indebtedness of municipalities in the Czech Republic and Slovakia from a comparative perspective. Our analysis focuses on the content of municipal fiscal rules, their impact on aggregate levels of local government debt in both countries and the financial situations of individual local governments with excessive debt. The findings indicate that municipal fiscal rules in Slovakia are slightly more comprehensive than those in the Czech Republic; however, the way they regulate aggregate level of municipal debt is very similar. Despite very similar starting points, the number of municipalities with excessive debt levels is significantly higher in the Czech Republic than in Slovakia. Though both countries face the problem that excessive borrowing is legally prohibited, the practice does still take place in a number of local governments. Excessive borrowing is exclusively found in small municipalities with a very limited chance to escape from the debt trap, as the regulatory regime of both countries does not lend itself to bailout or bankruptcy.
Juraj Nemec, Daniel Klimovský, Vladimir Šagát, Michal Plaček, Lucie Sedmihradská

Monitoring Local Government Financial Sustainability: A Dutch-English Comparison

Abstract
Monitoring of local public finance is an essential part of fiscal regulation, although national approaches interact with political and economic environments. England and the Netherlands provide telling similarities and differences in their local government contexts and approaches to such indicators. After a brief discussion of theoretical issues, this chapter compares the use of financial sustainability indicators (FSIs) in Dutch and English local government. It reviews the history, current use, bodies involved, the indicators themselves, and approaches to monitoring. In England, a long history of central oversight of local government, focused upon performance, came to an end in 2010. Ever since, there has been no systematic FSI monitoring, as central government has not implemented its own model, the NAO has not been legitimated, and the local government sector itself has only recently started focusing on financial resilience. The Netherlands has traditionally placed its focus with respect to FSI monitoring on fiscal rules, which are monitored at the regional level of the provinces. More than in England, the Dutch local government association has supported the development of FSIs whilst local government reporting on FSIs is mandatory. Finally, we show how different fiscal rules and governmental characteristics have resulted in contrasting developments of indicators and monitoring.
Dennis De Widt, Tim Thorogood, Iolo Llewelyn

The Implementation of Fiscal Regulation: Insights from Germany

Abstract
The fiscal regulation of local governments has a long tradition in Germany and is, theoretically, rather strict. The municipal budget law of German states clearly prescribes balanced budgets, monitoring and enforcement instruments as well as a dense structure of supervision. Nonetheless, the implementation of fiscal regulation has proven to be difficult and insufficient and has triggered academic discussion and organisational reforms in recent years. This chapter explores the question of how financial regulation is implemented in German local governments and the related obstacles it has had to overcome. The empirical analysis in this chapter triangulates documentary analyses, financial data, expert interviews and surveys with local treasurers and regulators. Our analysis reveals patterns; however, it does not allow for clear causal conclusions, as financial regulation often takes a case-by-case character. Regardless, this research opens avenues for better implementation approaches, such as the training of regulators, more central organisational structures of regulatory bodies and a change in regulatory strategy shifting towards the early identification of budget crises.
Christian Person, Falk Ebinger, Steffen Zabler

Fiscal Supervision and Party Politics: Lessons from Austria and Germany

Abstract
Models of effective fiscal supervision usually assume neutral and benevolent overseers. In reality, fiscal supervisors often lack such independence. If overseers and supervised officials are partisan, party favouritism and politics may replace other objectives. The two case studies discussed in this chapter show empirically how political alignment influences fiscal supervision. Austrian and German state authorities continuously and tightly supervise local governments, but fiscal supervisors are affiliated with political parties. In some Austrian federal states, the law explicitly allocates left-wing mayors to a left-wing member of the state government as fiscal supervisor and right-wing mayors to a right-wing overseer. This chapter presents evidence that such a setting induces collusion and contributes to less sustainable budgeting. In Germany, the influence of party politics in fiscal supervision of local governments is more subtle but still sizable. It is furthermore evident that fiscal supervisors in both countries use supervision policies to realise their party agendas.
Felix Roesel

Bailouts and Insolvency

Frontmatter

Preventing Local Government Defaults: No-Bailout Policy and Its Alternatives

Abstract
Fiscal decentralisation introduces the risk that subnational governments may act in a fiscally irresponsible manner in the belief that a higher tier of government will bail them out if they run into trouble. The economic literature, therefore, prescribes a strict no-bailout policy. We survey fiscal rules and fiscal policies concerning subnational governments in 20 European countries and find wide discrepancies, both between the theory and practice and between the rules and actual policies. Countries with a no-bailout rule often do bail out subnational governments, sometimes on a large scale, while countries lacking such a rule sometimes do not, or only sparingly. The fiscally responsible behaviour of subnational governments seems to depend upon a balanced mix of policy measures, notably providing sufficient funding, adequate fiscal supervision, early intervention mechanisms and bailout rules that are sufficiently unattractive. A no-bailout rule is neither necessary nor sufficient.
Maarten Adriaan Allers, Joes Gordon de Natris

Municipalities and Excessive Debt: Local Insolvency Regimes as an Alternative to Bailouts?

Abstract
In many countries around the world, local governments have considerable fiscal autonomy. They are able not only to raise revenues or spend money on their own but also to incur debt. However, the right to borrow inevitably implies the risk of insolvency and bankruptcy, which can have tremendous negative repercussions on service delivery by municipalities, endanger their proper functioning and create severe externalities for other jurisdictions within a federation. In principle, higher tiers of government have two options to deal with local debt crises: they can either implement bailouts or provide a mechanism to restructure municipal debt within a well-structured procedure. Therefore, this chapter discusses the role of local insolvency regimes as an alternative to municipal bailouts. First, the advantages and disadvantages of local insolvency regimes will be discussed from a theoretical perspective. Subsequently, empirical evidence from existing local insolvency regimes in Europe and the USA will be presented and examined. On this basis, core features and requirements, which a well-designed local-level insolvency framework should exhibit, will thereby be derived from this examination.
Christian Person

Four Decades of Municipal Bailouts in Germany

Abstract
Despite the existence of strict budgetary frameworks and fiscal equalisation systems, municipal budget crisis has been a phenomenon in Germany for decades. As an institutional response, most German states implemented bailouts to restore local public finances. This chapter gives a brief description of the history of municipal bailouts in Germany. We begin with the first small bailout programme in North Rhine-Westphalia during the 1980s. In the aftermath of the global financial crisis of 2008/2009, bailouts reached their peak with a broad diffusion of programmes reacting to persistent budget deficits and escalating local debt. States designed those programmes as conditional bailouts, as they were aware of the moral hazard risks. In a second step, we explain the different institutional designs, timing and impacts of these bailouts. Regarding design, we categorise bailouts by two basic goals, different instruments and scopes. We find different explanations for designs and timing regarding the political attitudes, financial market pressure and state fiscal capacities. Finally, we assess the impacts of bailouts on municipal fiscal performance, state-local relationships and local democracy.
Christian Person, René Geissler

Local Public Finance in Times of Crisis

Frontmatter

Global Crisis, Local Impact: A Comparative Approach to the Financial Crisis’ Impacts on European Local Levels

Abstract
The financial crisis did have tremendous effects on public sectors worldwide. While there is plenty of research on reactions at the state level and by single local governments, research on the particular impacts at local levels are scarce. This article evolves a framework of “direct” and “indirect” impacts covering 21 European countries. In referring to “direct” fiscal impacts, all local levels generated budget deficits in 2008/2009, and most faced significant increases in debt. The second category of so-called “indirect” impacts contains a qualitative assessment of structural changes made to the institutional frameworks at local levels, initiated by the states. Such measures affected grants, local structures or the allocation of functions between local levels and states. The most common “indirect” impact is the strengthening of fiscal regulation, which can be clearly traced back to the financial crisis and shows some effect of supranational EU legislation. This article exposes a great variance of fiscal trends and state measures as consequence of the financial crisis. Finally, consequences within institutional frameworks are more dramatic and lasting than fiscal ones. The financial crisis deeply affected state and local relationships through centralization.
Marcus Wortmann, René Geissler

Fiscal Consolidation in German and Greek Local Governments: Reform Attempts, Supervision and Local Measures

Abstract
Fiscal consolidation in Greek and German local governments differs for many reasons. While some German local governments experienced a long period of austerity, driven by economic decline and federal and state measures, the global financial crisis and ‘troika’ programme caused the need for harsh austerity measures in Greece. In addition, there is a different institutional context for local governments in both states, accompanied by different revenue autonomy and state influence. Therefore, local options in Greece were limited, and local governments had to focus on spending cuts, whereas German local governments largely relied on increasing tax rates. The one commonality is in the field of regulation, when both states strengthened fiscal rules and supervision and established a bailout programme. However, intense monitoring, the implementation of fiscal rules and the ‘top-down’ actions of supervisory bodies in Greece fundamentally exceed German practice. Finally, fiscal consolidation in Greece was much more difficult and went hand in hand with minor local discretion.
Maria-Artemis Kolliniati, Philipp Stolzenberg, Nikolaos-Komninos Hlepas

Financial Decisions, Intergovernmental Grants and Regulatory Instability: The Case of Italian Municipalities

Abstract
Because of the global financial crisis, central states implemented a range of recovery plans, austerity measures and cutback strategies, which created significant challenges to local governments. This article examines the influence of (adverse) national adoptions in the fiscal regulatory framework on local revenues and expenditures. Building on economic theory, we evolve a set of hypotheses on local fiscal policies. To test these, we use panel regressions of more than 1000 Italian municipalities between 2008 and 2015. Italy is a particularly suitable case for this research, since the financial crisis strongly affected the country and the central government implemented multiple changes to the institutional framework, which created great instability for local governments. In general, Italian municipalities have shown a specific pattern of financial decision-making as a reaction to revenue grants, i.e. positive effects on current and capital expenditures and on own revenues. We also found that changes in the legal and financial framework influenced patterns for capital and personnel expenditures, suggesting that certain patterns of reaction are more contingent than other ones. Moreover, this article contributes to the understanding of regulatory instability on local level decision-making and shows that instability cancels the influence of some usual determinants.
Emanuele Padovani, Céline Du Boys

Insights from City Financial Realities: Comparing and Learning Across Borders

Abstract
Improved financial management and the sustainability of local governments is a key ingredient to future growth and the prosperity of countries, especially in an era where crises require countries to be prepared for resilience. However, a significant barrier to improvement in this regard is the insufficient exchange of knowledge from practitioners across borders. The contribution of this chapter is twofold. Firstly, we aim to provide insights from the frontline of local finance management based on the work carried out within the European City Economic and Financial Governance (CEFG) Group. The CEFG Group is a community of practice among eight European cities, wherein cross-border city level fiscal and financial management issues are discussed with city CEOs and CFOs. Secondly, we put emphasis on accounting, as this is the part of the regulatory framework that consistently influences financial sustainability, how local governments perceive themselves and how they are perceived by others. The CEFG Group represents an interesting and unique cross-border experiment to examine the threats and opportunities of measuring and comparing the financial health and sustainability of local governments. Also discussed in this chapter is the CEFG Group’s own framework known as the financial health template, which contributes to cross-border comparability and demonstrates that comparison of local financial performance is possible despite the different accounting, regulation, legal and administrative contexts.
Alexander Heichlinger, Julia Bosse, Emanuele Padovani

Taking Stock: The Role of the Institutional Context for Local Government Financial Resilience

Abstract
Financial resilience describes the ability of local governments to anticipate, absorb and react to shocks affecting their finances and service delivery. Resilience is the result of interactions in-between environmental conditions (institutional, economic and social context) local governments operate in as well as internal capacities (i.e. anticipatory and coping capacities). This chapter looks on mechanisms of how the institutional context influences local government’s ability to anticipate, absorb and react to financial shocks. Drawing upon empirical research on governmental financial resilience, the authors take stock of lessons learned from case studies in eleven countries as well as a large-scale quantitative survey of local governments in three major European economies (Germany, Italy and the UK) following the global financial crisis. The concise overview adds to the understanding of how rules, regulations and (austerity) policies of upper-governmental levels influence different dimensions of local government financial resilience and why the latter may play out very differently within a given country. The findings support a more general understanding of how local governments face shocks and crises and thus may offer initial clues on local government financial resilience in the global COVID-19 pandemic.
Iris Saliterer, Sanja Korac, Carmela Barbera, Ileana Steccolini

Local Government Tax Structure

Abstract
Designing the system of local funding implies the allocation of different tax sources to local governments. This challenge is of particular interest in times of economic recession since tax revenues can stabilise local revenues and therefore limit the need of fiscal regulation. International organisations promote a shift from labour taxes towards less growth-deteriorating consumption taxes. The recommendations for local governments aim at an increase of property taxation, which yields rather stable revenues over the business cycle. At first glance, this advice seems to describe a path of optimisation, minimising adverse economic effects and providing local governments with more reliable revenues. From this starting point, we analyse local tax structures across Europe with Eurostat data from 2004 to 2018. This study reveals that in times of economic slowdown, the share of potentially more growth-deteriorating local income tax revenue increased relative to the share of consumption tax revenue. Moreover, revenue from the current local tax basket is quite dependent on cyclical variations. Both imply that there is room for improving local government tax structures. However, although there are criteria for an optimal local tax structure, revenues should match the set of public services. As local governments provide quite heterogeneous sets, there is no one-size-fits-all solution.
Viktor Trasberg, Christian Raffer, Antti Moisio
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