Sub-national Finances and Fiscal Consolidation: Walking on Thin Ice

Camila Vammalle and Claudia Hulbert
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Camila Vammalle: OECD
Claudia Hulbert: OECD

No 2013/2, OECD Regional Development Working Papers from OECD Publishing

Abstract: Recent crises and national consolidation packages affected sub-national finances. In many OECD countries, central governments introduced reductions in transfers to sub-national governments, and established expenditure and/or deficit objectives to be met by local or regional authorities. Such measures have reduced the financial room of sub-national governments for implementing key public services or investments. In parallel, borrowing conditions deteriorated for many sub-national governments, as banks and financial markets became increasingly reluctant to lend. Since late 2008, financial markets started discriminating between high- and low-quality SNG bonds, and yields reached record-high levels for sub-national governments perceived as less creditworthy. Facing degraded finances, upward pressure on expenditures and deteriorated borrowing conditions, many sub-national governments have used public investment as an adjustment variable to reduce their budget deficits and preserve their spending on welfare, health or education. However, such policies may hinder long-term growth perspectives.

Keywords: bailouts; fiscal stress; public debt; sub-national government (search for similar items in EconPapers)
JEL-codes: H12 H70 H74 H81 (search for similar items in EconPapers)
Date: 2013-03-11
New Economics Papers: this item is included in nep-pbe
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