THE IMPACT OF THE ECONOMIC CRISIS AND OBSTACLES TO INVESTMENTS AT LOCAL LEVEL.

• Author: Slijepcevic, Suncana

1. Introduction

   The purpose of this paper is to analyze the impact of the economic crisis on the fiscal stance of local government units and their possibilities to manage the local development policy and finance capital projects. The economic crisis that began in 2007 in the U.S. has been considered within the economic literature as the worst economic crisis since the 1930's and the literature suggests that, due to its depth and prolonged duration, its consequences could be felt for ten years (Levine, Justice and Scorsone, 2013). The global financial crisis has seriously deteriorated the fiscal position of governments in countries all over the world despite the level of their development. The general government deficit rose due to the lower collection of revenues, as well as the rising expenses for additional social spending which are needed to alleviate the crisis' effects (United Cities and Local Governments, 2009). Local economies were faced with rising unemployment, debt financing problems, business closures and bankruptcies, investment decrease, drop of property values, reduction of demand and others (OECD, 2009; Guidoum and Soto, 2010). Croatia entered the crisis in the period of unsustainable economic growth dependent on strong domestic demand, current account deficit, and credit growth (Bakker and Klingen, 2012). High vulnerability and rather low external competitiveness of the economy further narrowed the maneuvering space to reduce the impact of the crisis (Bakker and Klingen, 2012). The case of Croatia's deep and prolonged economic decline in the period 2008-2014 has shown that EU membership did not reduce exposure to recession, neither has it buffered the negative effects in the early membership phase.

   The countries and, within them, different levels of government had at their disposal different approaches to fight crises. Clark's (2009) analysis of 41 local economies' responses on crises shows that they have conducted different types of measures. However, measures aimed at mitigating the effects of the recession at local level could not prevent consequences on unemployment (OECD, 2009) and, consequently, on revenues from income taxes (Jonas, 2012; Guidoum and Soto, 2010). Although most of the transition countries conducted reforms of transfer of expenditure authorities to local government, decentralization reforms where mostly proceeded by the method of trial and error and, in some cases, with the lack of appropriate transfer of responsibilities, which caused that some local public services sometimes remained the responsibility of the central government and vice versa (International Monetary Fund, 1998). Croatia, a country where the process of decentralization started in 2001, is not an exception. Jurlina Alibegovic, Slijepcevic and Kordej-De Villa (2013) stress that the decentralization reform in Croatia, in its first phase, was directed both to administrative and fiscal areas, but that the transfer of responsibilities was not accompanied by the adequate transfer of financial resources. Despite that, a significant part of public services remained under the control of local government units, while financial resources remained mostly under the control of the central government. Therefore, they could be easily affected by central state decisions. A similar problem of mismatch between local government responsibilities and financial resources has been noticed in some other European countries such as Germany, Sweden, and Austria (Pucher, Martinos and Schausberger, 2016). Eyraud and Moreno Badia (2013) analyzed the local government budgets in EU15 countries in the period 2001-2011 and concluded that in the first two years of the crisis (2008-2009) increases in local government expenses were financed from transfers from the central government, while in the subsequent two years (2010-2011) there was no further increase in central government transfers, but also in local government expenses. Their analysis also showed that in EU15 local government own revenues dropped during the crisis. Jonas (2012) discussed the fiscal impact of the 2007-2008 recessions on state and local governments in the United States and showed the high volatility of revenues from income taxes. He noticed that the fiscal response to recession depended on fiscal rules on borrowings.

   Reviving investments became the top European Union priority and local government has an important role in it (Committee of the Regions, 2016). The level of investment in two-thirds of the European Union Member States, including Croatia, remained below pre-crisis level (European Commission, 2016; Committee of the Regions, 2016; Pucher, Martinos and Schausberger, 2016). The purpose of this paper is to examine the impact of the financial crisis on the fiscal stance of local government units in Croatia and their possibilities to finance capital projects which are necessary for local economic development. Researches about the regional impact of crises are rare. Since there has been noticed an alarming drop of public investment at local level in the European Union (Pucher, Martinos and Schausberger, 2016) and the European Commission (2016) stresses that the Member States should put efforts into identifying and removing obstacles to investment at regional and local level, the article analyzes obstacles to investment at the local level from regional councilors' perspectives in the country belonging to the group of European Union Member States which was hit hardest by the crisis and experienced a larger drop in investments. The paper focuses on members of regional assemblies due to the fact that they have an important role in fostering public investments, creating a proper environment for fostering private investments and ensuring sustainable development at local level.

   The article consists of four parts. After the first introductory part, follows an analysis of fiscal stance of local government units in Croatia in the pre-recession and recession periods. In this part, the fiscal imbalance is analyzed in connection with the level of local units' development as measured by the development index. The analysis of regional councilors' attitudes toward possibilities and barriers to finance capital projects are provided in part three of this article. Part four summarizes the results and presents the main conclusions.

2. Fiscal stance of Croatian local government units

   Even though the level of decentralization in Croatia is lower than in most of the other European Union countries, the very long recession, which started in the fall of 2008, had a significant impact on the local government. Most of the local government units in Croatia, in the pre-crisis period, enjoyed a relatively favorable fiscal stance, even though it has to be emphasized that it was mostly based on central government transfers to local government and not on own resources. In Croatia, local units use, for financing their tasks and investments, tax and non-tax revenues, grants (mostly from the state budget) and capital revenues. However, local government units can influence only the tax on the use of public areas and, partially, the non-tax revenues which are in fact revenues whose purpose is prescribed through special regulations, while they do not have influence on most of the other revenues (Jurlina Alibegovic, Slijepcevic and Kordej-De Villa, 2013; Slijepcevic, 2014). Municipalities, towns, and counties can independently control the rate of certain types of revenues, but within the limits prescribed by the central government. They therefore have very limited local autonomy and, in spite of the decentralization process, the revenue side of the budget is still largely centralized and depends on decisions of the central government. The limitations of such policy could be especially perceived during recession.

   The total budget of 576 local and regional self-government units has been decreasing since 2008. During the recession budgets of all levels of local units decreased, but mostly those of the cities and municipalities. In 2016, budgets of cities and municipalities were still below the 2008 level, while a slight improvement of counties revenues could be observed (Figure 1). Total sub-national revenues were 7.6% lower in 2016 than in 2008.

   In this article fiscal imbalance is measured by two indicators. The first one is share of total local government units' revenues in total expenses. The second is share of local government units' revenues without grants in total expenses. Figure 2 shows that the level of fiscal imbalance continues to be higher than in the most favorable year of the pre-recession period (2007). Local government units' were confronted with the highest fiscal imbalance in 2009 when total revenues without grant covered only 78% of total expenses. In 2016, local government units' own resources were still lower than in 2008.

   The financial crisis had a significant impact on the level and structure of local government budgets and influenced both sides of the budget (revenues and expenses), but also deteriorated the level of development of local government units.

   The level of local development can be measured with the official local development index according to the Regulation on the Development Index from 2010. The local development index is calculated as a weighted average deviation from the...