Pandemic threatens with “scissors effect” local and regional finances

A joint CoR-OECD survey warns 90% of them expect revenues to fall putting public investments at risk

Regions and cities in Europe  are strongly affected by the Covid-19 crisis and most local and regional authorities expect the socio-economic crisis to severely affect their finances, shows a joint CoR-OECD survey.

These authorities fear a “scissors effect”, over the short and medium-term horizons, of increasing expenditure and falling revenues that could undermine their capacity to carry out public investments. Regions and cities have been on the front-line of addressing the pandemic and its socio-economic consequences.

Beyond the health and human tragedy, Covid-19 is having a profound effect on local and regional authorities (LRAs). To better understand it, the European Committee of the Regions (CoR) and the Organisation for Economic Cooperation and Development (OECD) carried out an online survey in June and July 2020 on the impact of Covid-19 on regional and local governments.

The survey confirms the severe effect of the Covid-19 crisis on regions and cities in the European Union, as for 63% of respondents, the overall impact is "strong" or "very strong". Nearly half of authorithies (46%) reported that the main challenge in dealing with the crisis has been the lack of technical means and equipment, while 39% indicated the lack of financial resources. At the time of the survey, only around half of the respondents stated that coordination within LRAs or with national governments had been effective.

Some of the survey's key findings fed into the first EU-wide Annual Regional and Local Barometer, presented on the 12 October by the CoR's president Apostolos Tzitzikostas, during the 18th European Week of Regions and Cities. 

Talking about the joint survey, Michael Murphy (IE/EPP), chair of the committee’s ECON commission and member of Tipperary County Council, he specified that its timely results will help to make informed policy choices to support local and regional governments with tackling the results of the pandemic on their finances. We have been at the forefront fight to tackle the effects that this unprecedented crisis has brought in front of us and as a result many local and regional governments suffered extreme financial pressures, he said adding that all levels of government need to work together at this time to ensure that our recovery is sustainable, smooth and does not leave anyone behind.

Lamia Kamal-Chaoui, Director of the OECD Centre for Entrepreneurship, SMEs, Regions and Cities also accented that local and regional authorities are at the forefront of responding to this crisis and are now acutely feeling the financial effects of their enormous efforts. They cannot continue to tackle this disjointedly and all recognised (90%) that crisis response coordination amongst all levels of government is of the utmost importance for a successful exit strategy, she underscored. The director also pointed out that governments must make a concerted effort to coordinate effectively and implement meaningful policies that will help these local and regional areas emerge from the crisis more resilient and sustainable”.

The crisis is affecting sub-national authorities' revenues, with a dangerous "scissors effect" of increasing expenditure and falling revenues. 86% of regions and cities expect a high or moderate negative impact on their expenditures, particularly in social services (64%) and social benefits (59%). Meanwhile, on the other hand, 90% forecast a revenue decrease. Tax revenue is anticipated to be the most likely affected revenue source: 83% of respondents foresee a large or moderate decrease.

At the time of the survey, about 24% of subnational governments planned to ask for new borrowing to cope with the crisis. 13% of respondents had already applied for additional EU funds and 49% were considering doing so.

The survey also shows that the Covid-19 crisis may reshape priorities in regional development policy. LRAs are calling for more focus on affordable and accessible quality basic services including health to all territories (76%), regional resilience (69%) and reducing digital divides across regions (68%).



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