Local governments have been slow to react to changes in the economy

Toomas Mattson | 4/26/2010 | 9:47 AM

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TALLINN, 26 April 2010 - The National Audit Office has audited the changes that took place in the financial statuses of local governments in 2009 and found that many local governments were slow to react to changes in the economic environment. There were delays in accepting the need to reduce costs and in implementing relevant measures, as a result of which there was significant spending of reserve funds amassed in previous years. With revenue continuing to decrease, this has placed local governments in a difficult position in 2010.

The recession has reduced local government revenue by 10%. Compared to 2008, the revenue earned by municipalities and cities in 2009 fell by 2.5 billion kroons or 11%, from 22.7 to 20.2 billion kroons. Almost all local governments were affected by such losses in revenue during the year.

The absolute amount of the decrease in revenue from income tax is generally within the limits of 20%. Such revenue earned by local governments in 2009 fell to around the 2007 level.

The state cut its support for local governments by 20%. Worth noting here is the fact that although the overall amount of support allocated fell by 11%, the targeted support from the state for the acquisition of assets, as an example, fell during the same period by as much as 75%. Also worth mentioning here, given the general decline in revenue from support, is the proportional increase of European Union (EU) funding in the total amount of support granted. In 2008 EU funding accounted for 12% of the targeted financing provided to local governments; in 2009 the same figure was 39%.

Expenditure has been significantly reduced in areas of activity supported by the state. Of the tasks which are required to be fulfilled by local governments, the greatest comparative reduction in funding between 2008 and 2009 can be seen in roadwork, with 93% of local governments recording lower costs in this area and the overall amount spent being 0.7 billion kroons lower. Much less funding was also allocated to nursery schools, cultural institutions and sports, and in general government costs were reduced as well. The decrease in expenditure on roadwork and nursery schools was significantly influenced by the reduction in support being paid out by the state.

Expenditure was primarily curbed through cutbacks on administration costs and investments. Although around 90% of local governments managed to reduce their spending on administration and personnel, around a third as many cities and municipalities did not. The amount spent on investments in 2009 was markedly less than even the same figure for 2006. Local governments have been slow to reduce expenditure. It was only towards the end of the year that they managed to bring their costs into line with their decreased revenue.

The local government sector deficit grew in 2009, as did the number of local governments whose expenditure outstripped their income. A large proportion of local government reserves needed to be spent in order to make up the shortfall. The number of local governments whose costs exceeded their revenue rose from 47% in 2008 to 62% in 2009, with the local government sector deficit reaching 1.2 billion kroons by the end of the year. Their reserves were rapidly depleted at the same time: from 1.7 billion kroons at the end of 2008 to just 1 billion kroons a year later. This has had a major impact on the solvency of local governments, which in many cases has worsened.

Growth in loan debt slowed in 2009. It was not only the changes in the economic environment that put the brakes on local governments borrowing money, but the state: since March 2009 they have only been allowed to take out loans for the purpose of completing projects funded with EU support. There has also been a rise in the proportion of local governments whose loan debt indicators are exceeding the limits established in law. There were five such local governments at the end of the 2007 financial year; by the end of 2009, there were 14.

The National Audit Office audited the changes that took place in 2009 in the expenditure and revenue and financial statuses of municipalities and cities. The aim of this overview was to investigate the changes that occurred against the backdrop of the fall in gross domestic product and public sector revenue in the revenue, expenditure and financial statuses of cities and municipalities in order to ascertain how local governments have coped with the worsening in the economic situation.

Toomas Mattson
Director of Communications Services
National Audit Office
Telephone: +372 640 0777
Mobile: +372 51 34 900
E-mail: toomas.mattson@riigikontroll.ee
 

  • Posted: 4/26/2010 9:47 AM
  • Last Update: 11/10/2015 6:01 PM
  • Last Review: 11/10/2015 6:01 PM

Many local authorities tried to delay cutting their costs when income decreased suddenly and their budgets are now ‘in the red’.

Corbis/Scanpix Baltics

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