Thursday, 17 March 2011: 15:30
The world crisis of the banking and financial sector of 2008 had significant impact on national economies of USA, and EU: GB, Germany, France, and particularly Greece, Ireland, Portugal and Spain, but also on Russia, China, and other Asian countries. One could observe signs of crisis on the credit and property market well before the spectacular collapse of the Lehman Brothers bank. Nevertheless, at the end of 2008 the financial system was paralyzed, and in order to facilitate liquidity, governments of many countries, first of all USA, started to “pump” billions of dollars to the banking system and economy. The additional money on the market and government loan guarantees slightly facilitated credit market and encouraged banks and financial institutions in their activity. The USA government spent hundreds billion dollars to rescue AIG, Goldman Sachs and Morgan Stanley, but over 2008-2009 lost 8,3 m. work places, of which only one m. were restored until August 2010. The unemployment rate in UE is very high, close to 10%, and in Spain, Latvia and Estonia, above 20%. May be we pay too high a price for rescuing banks. As a result of the crisis it were not only banks, but also non-financial corporations and citizens who suffered. Poland was the only EU member state, which succeeded in maintaining positive (though low) growth rate in 2009 and managed to return on a path of faster growth in 2010. Despite of this, the crisis had a detrimental effect on the finance of the general government sector, specially the local government sub sector. Significant decrease in operating revenues and necessity to finance long term development programs (including those co-financed by the EU) led to rapid increase in net borrowing and local government debt. At the same time Poland began to implement an ambitious fiscal stabilization plan aiming at meeting criteria under the EU Stability and Growth Pact. Matching these two broad objectives poses a challenge for the local government finance. The objective of the paper is to analyze an impact of the world financial crises on situation of local governments (LG) and its citizens. We look at government finance indicators in select countries over 2007-2009, and in addition, we analyze, over the same period, GDP growth rate and taxable income per head in select European regions. Then, we examine the Polish case and present the likely causes of the crises in future years. We present a decrease in LG total revenues, and several categories of revenue (PIT, CIT, property tax, local tax on products), and the growth in indebtedness as a result of LG attempt to maintain investment at an acceptable level. We also analyze the role of the EU funds and the impact of co-financing principle on the budgetary outcome of local governments. Finally, we discuss alternative approaches to the question of reconciliation of development policy priorities at the local level with constraints resulting from the Stability and Growth Pact.