Fiscal contexts at a subnational level

further pressures that are disproportionately felt by working mothers. COVID-19 has also proved challenging for female entrepreneurship, including women-owned microenterprises in developing countries that comprise a large share of female labour-force participation there.

According to one estimate, extrapolated from data in India and the US, “female job loss rates due to COVID-19 are about 1.8 times higher than male job loss rates globally”.³⁷

Figure 3.5 shows the decline in employment in selected countries, disaggregated by gender, between the second quarters of 2019 and 2020. Women experienced larger declines in employment in all countries, except for Mexico.

Costa Rica, Colombia and Ecuador had the widest gap in employment declines between men and women at 11.5, 9.3 and 8 percentage points, respectively.

3.3.2. Fiscal contexts at a subnational

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sector, have been significant for many cities.

Furthermore, the decline in public transport use also means revenue streams for transport providers – public and private – are drying up.

In combination, these pressures have led to a “scissors effect”, with subnational government expenditure curves increasing while at the same time their revenue curves have declined.³⁹ Still, the pandemic has forced local governments to spend much more on previously unknown expenditures, such as testing and tracing, purchasing and stockpiling personal protection equipment and other medical provisions, augmenting digital service delivery capacity, including of schools, and paying for physical distancing arrangements in offices, markets and public spaces. The adverse fiscal impact on subnational governments is happening in countries of all income levels across the world. In Table 3.2 below, some initial estimations are presented.

Another factor determining cities' ability to respond to the crisis effectively is the source of their revenues. While own-source revenues are the most adaptive financing source and can be relatively easily rechanneled towards the

A doctor in a protective suit taking a nasal swab from a person to test for possible coronavirus infection © Shutterstock

Box 3.2: Cities supporting the productive sector

In a context where many urban areas are struggling to prevent bankruptcies and job losses among local businesses, some have pioneered an array of initiatives with the aim of catalyzing economic recovery. A small selection of some relevant strategies from different cities are presented below:

• Houston (US) created the Greater Houston Business Recovery Center to drive a business-led recovery in the city and deliver advice on policy and financing linked to recovery plans.

• Maringa (Brazil) established a task force in June 2020 to design its Economic and Social Development Recovery Plan, drawing on collaboration between local authorities and Sebrae (Brazilian Micro and Small Business Support Service). Integrating consultations and feedback from academics, civil society organizations and businesses, the aim of the plan is to generate employment, legal reform, investment and other gains

• Nice (France) announced an employment agreement to strengthen the city’s economic recovery, with an additional €3.5 million to bolster the most at-risk businesses and SMEs in the region, focusing in particular on the worst-hit sectors such as tourism, trade and industry to strengthen economic resilience.³⁸

epidemic response, they remain low in many countries. In developing countries, the proportion of municipal own-source revenue is under 10 per cent of the total local government budgets, meaning it is insufficient for an effective epidemic response.⁴⁶ Therefore, many subnational

governments, especially in developing countries, rely on external funding, such as national government transfers, leaving subnational governments dependent and vulnerable. Between 70 and 80 per cent of central government transfers come as non-discretionary grants ring-fenced for specific areas, with little leeway for city authorities to redirect these to local epidemic responses.⁴⁷ Furthermore, as national governments themselves end up in a fiscally restrained position due to the crisis, transfers to subnational governments are in some cases decreased and payments delayed. As subnational governments’ transfers from central governments are often based on the previous year’s activity (for example through national government equalization transfers or tax sharing), their fiscal

position worsens for several years following a pandemic to a time-lagged effect. Evidence shows this happened to many subnational governments during the 2008/09 recession, with restrained subnational fiscal positions even after some recovery at the national level.⁴⁸

A third factor to consider in cities’ ability to protect their citizens is their budgetary spending rules. Subnational governments in developing countries tend to have less room for manoeuvre than national governments due to stricter fiscal rules. The main goal of such fiscal rules is to ensure fiscal sustainability at the subnational level – but, restrained by fiscal rules, in a time of crisis, subnational governments may be forced to reduce expenditure (often public investment) instead of running temporary deficits, thus creating a pro-cyclical effect which can further reduce fiscal revenue over several years. The more rigid rules are, and the shorter timeframes they apply to, the more susceptible are they to pro-cyclical tendencies.⁴⁹ To combat this pro- Table 3.2: Estimated impact on selected subnational governments’ fiscal position

Region Fiscal impacts

Africa African local governments are expected to see a significant drop in local finances. In a best-case scenario, the decline for 2020 is estimated to be 30 per cent, rising to 65 per cent in the worst-case scenario. Revenue from licenses, fees, local service taxes, property taxes and other sources is anticipated to fall by around 50 per cent.⁴⁰

Asia and the Pacific A significant increase in subnational debt is expected in Australia, China and Japan as subnational governments, particularly regions and large cities, are applying a countercyclical fiscal policy to support local economies. In China, local government debt could reach a record of nearly ¥3 trillion for the first five months of 2020, up from ¥1.9 trillion in 2019. ⁴¹ Latin America & The Caribbean There are stabilization funds with resources from commodities and central government contributions in Mexico and other

countries in the region. These are quickly declining, however, inducing a risk of decreased funding.

The Middle East & North Africa According to estimations, Moroccan municipalities can expect a 25 per cent drop in revenue and a 10 per cent increase in expenditure in 2020 due to COVID-19. It would leave Moroccan municipalities with a fiscal deficit, making them unable to repay their debt and finance their investments, meaning residents would lack essential urban infrastructure.⁴² Europe In Austria, a fall of between 7 and 12 per cent in state tax revenues was predicted as a result of the pandemic. At the

municipal level, it has been calculated that the crisis could incur up to €2 billion in extra spending during 2020. In Finland, it was projected that the added costs and lost revenue of COVID-19 to municipalities in 2020 would come to around €1.6 – 2 billion, accounting for 4 per cent of total municipal revenues.⁴³

North America In Canada, it was estimated that municipalities could lose between Can$10 and Can$15 billion in revenue over six months, depending on the severity and duration of the pandemic-related shutdown.⁴⁴ In Phoenix (US), a significant proportion of the city’s revenue comes from sales taxes related to retail sales, tourism and entertainment. Before the COVID-19 outbreak, Phoenix was projecting a US$28 million surplus for the upcoming fiscal year. In a projection where the pandemic’s full impact lasted until July 2020, it was instead anticipating a US$26 million deficit as an optimistic estimate of COVID-19’s impact on Phoenix’s budget.⁴⁵ This deficit would grow with every month the pandemic lasts.

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cyclical effect, exemptions to fiscal rules may be necessary during a crisis. In Johannesburg, for instance — hit, like many other cities, with significant economic contraction during 2020 as a result of the pandemic — the national government’s relaxation of some spending restrictions allowed local authorities to reallocate some of their budget to meet their most

pressing needs. However, for many subnational governments, especially in developing countries, even this is not a legal possibility. National governments should consider relaxing rules on earmarked national transfers and possibly local borrowing, while bearing in mind the common risks inherent to subnational borrowing in many developing countries.

In some developed countries with a unitary government structure, the expansion of local government powers took the form of more borrowing and funding as well as greater fiscal room to address the immediate socio-economic effects of the pandemic. In Denmark, fiscal rules were temporarily relaxed to allow municipalities to go beyond their normal spending limits, while in Spain local governments were authorized by decree to use surplus funds to support social services. This approach — granting more borrowing to subnational levels of government to cover COVID-19-induced expenditures — was also employed by developed countries with a federal government structure. The Municipal Liquidity Facility was established by the US Federal Reserve to provide up to US$500 billion in loans to states and municipalities. In Canada, similarly, the Ontario government partnered with the federal government to deliver Can$4 billion in one-off assistance to the province’s 444 municipalities.

3.3.3. Supply chains, digitalization and