Impact of the Global Crisis on Sub-National Governments’ Finances

Authors:
Preprint
Publisher website
Google Scholar
Abstract
In this paper, Ter-Minassian and Fedelino assess the impact of the 2008-09 global financial crisis on sub-national government (SNG) finances. The crisis affected sub-national budgets both directly (via the decline in own revenues and upward pressure on cyclically-sensitive spending programs) and through the involvement of SNGs in the implementation of the national fiscal stimulus packages. To mitigate the impact of the crisis, central governments in a number of countries increased general-purpose and especially special-purpose transfers; in some cases their support also took the form of a temporary relaxation of fiscal rules and borrowing constraints, or a direct provision of loans. Thanks to this support, and by using their own available "fiscal space", some SNGs could enact counter-cyclical responses. However, in most cases it was not possible to avoid pro-cyclical revenue increases or expenditure cuts. Based on this evidence, the authors challenge the traditional view that excludes any role of SNGs in fiscal stabilization. Consistently with the ongoing decentralization of spending, inter-governmental fiscal arrangements should facilitate sub-national counter-cyclical policies, including through sub-national fiscal rules that ensure a build-up of adequate reserves and reduce the risk of pro-cyclicality. The introduction of institutional mechanisms for coordination across government levels would also help minimize adverse inter-jurisdictional spillover effects and improve the credibility of the overall fiscal strategy.