The Effects of a Failing Economy on Local Budget, Term Paper Example

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Term Paper

Introduction

The global economy has been suffering from a financial crisis for the past years. The impact of the global financial crisis erupted in 2007. Its impact still lingers as the global economy emerges as the global economy tries to rise from the Great Recession. All the urban communities and financial sectors around the globe received their share of blow from the financial crisis. In fact, economic analysts offer a somewhat pessimistic view on where the global economy is heading. Head of strategy at Société Générale Albert Edwards has predicted that the financial crisis will climax this year (Elliot). This is due to a looming sharp decline in China’s economy. This means that the global economy will suffer further turmoil in the coming months.

The effects of the financial crisis reverberate at all levels and financial sectors of modern society. This paper explores the effects of a falling economy on local government, specifically on local budgets for municipalities. This study first discusses the impacts of global financial crisis on local governments. The next subtopic is on how the impacts happen in various levels. The causes of these impacts are also briefly discussed. The discussion will then proceed to the impacts of the financial crisis on local budgets. This paper also identifies and discusses measures municipalities can take to weather the storm.

Discussion and Analysis

Impact of the Global Financial Crisis

Municipalities are now facing fiscal burdens (GWI). More and more municipalities now face debts and threats of bankruptcy. Other problems that municipalities and cities face during the economic crisis were the widening municipal budget gaps, deterioration of property values, and the worsening problem of vacant houses.

The impacts of the global financial crisis made local governments grapple with a number of constraints. As a consequence, municipalities suffer the blows of budget cuts. These constraints have cumulative effects, albeit they are disparate in nature. The impacts of the financial crisis occur on four levels of the local governments (Paulais). These are on the levels of revenue, expenditures, financial capacities, and foreign investments.

A sharp decline happens in the revenue (Paulais). Municipalities from around the globe differ significantly in their situation. For instance, the losses of capital directly affect the local governments that have the capability to invest their funds to the market. The impact of decreasing revenue from real estate activities also affects tax revenue.

The sharp slowdown in economic activity results to increase in expenditure (Paulais). The decreasing subsidies for public services results to increase in expenditure. Note that the local government usually covers expenses in public services. The budget local governments allocate for public services are fairly constant. This means that there is a heavy burden to local governments that experience skyrocketing social budgets. The increasing rate of unemployment and the needs for social welfare services come with the decrease of economic activities. These situations contribute to the burden local government face in terms of budget for public services.

The difficulty of obtaining loans and increase in the cost of money shrink financial capacities (Paulais). The depreciation of local government accounts may contribute to the constraint governments’ ability to obtain loans. There are other factors that affect municipalities. A factor includes the financial system’s lack of liquidity. Another factor is the general lack of will to invest, and the increased cost of money. There are countries where the government does not allow local governments to borrow directly. There are also countries where local governments do not have access to loaning. These situations happen in both developed and developing countries. In such cases, there are no drastic changes in the situation.

There is also the decline in foreign investment (Paulais). There is also a sharp decline in public-private partnerships. These declines heavily affect some sectors, translating to problems municipalities in terms of water supply, sanitation, and transportation. There is a general reduction of commitments of investors and operators in areas with the highest risk.

Impact of the Global Financial Crisis on Local Budget

The global financial crisis affects local government units’ budgets in both developing and the most developed countries. This is due to the sharp slowdown of economic activities. The measures municipalities can take in terms of managing their budgets differ significantly among locations. For instance, in America: Utilizing guarantee mechanisms aiming to relaunch the bond market is one proposal. The national government establishes this mechanism, while the local government manages it on a non-profit basis (Paulais).

There is a rise in expenditure due to the aforementioned factors that come with financial crisis (Paulais). This means that municipalities need to reduce their budget for other areas in order to provide budget for public services. Municipalities contribute effort to reduce the cost. These measures apply to administrative overheads. These include decreasing overtime and bonuses. Such efforts also include reducing official entertainment and telephone usages. Municipalities, to weather the storm, also freeze acquiring vehicles and furniture as avoid hiring new permanent personnel for vacant positions.

This paper pays particular focus on public service fund reassessment to weather the storm. This is because of the prevalent impacts of the financial crisis on the population in general. As mentioned above, such aftermath includes the rise in the unemployment rate and increase in service expenditure for long-term care. The measures that local government can take in managing budget for social services can be for short-term or long-term mitigations.

Leaders of municipalities should reassess and reprioritize expenditure for public services is a short-term mitigation measure (Paulais). This is crucial especially in the face of decreasing revenue and increasing demands. There are three groups of people whose needs the local authorities should take into consideration in managing their budgets. There groups of people were the service user groups, social services employees, and expectations of the population in general. Striking a balance in meeting their needs may be a difficult, yet necessary task. There is also a need for public sector managers to reassess spending plans. There was a survey among social services directors in 2009, asking for recommendations on ways to save five percent.

The recommendations include requiring users to pay more amount than before towards the cost of care. Another requirement is to shut down some services deemed “less essential”, such as cultural activities. Reducing allowances allocated for staff training programs is another recommendation. There are also social services directors suggesting for negotiations with trade unions. Such negotiations aim for the reduction, if not freezing, annual staff salary issues. Moreover, there are directors recommending halting planned capital investments. Others recommend avoiding recruiting permanent new personnel to new positions (Paulais).

Passing annual budgets for municipal authorities should also be well-discussed (Paulais). This means that the finance departments and local leaders should determine the amount of budget that each department can save annually. However, political considerations can make this process complicated. When it comes to providing short-term means to weather the storm in a financial crisis, one key challenge for public service managers’ concerns balance: that is, to find means to make a balance between the interests of politicians, service users, and social services personnel.

This paper also pays focus on measures to address the issue of bankruptcy municipalities and cities face in relation to budget gaps. Trimming debt obligations is a proposed measure. This trimming happens in the restructuring process. Structuring deficits, as a budget analyst maintains, calls for structural solutions. Some municipalities set a moratorium for debt service payment (Cohen).

Conclusion

Like everything else, municipalities took their share of blow from the global financial crisis. The impacts of the global financial crisis occur on the levels of revenue, expenditures, financial capacities, and foreign investments. Specifically, these are the sharp decline in revenue, higher operating cost, difficulty gaining access of borrowing, and the collapse of investment and public-private partnership activities. The degree of difficulty municipalities differs according to their locations. In general, municipalities and cities face the same set of problems. These problems are financial instability and unbalanced budgets. Moreover, issues such as a reduction of municipalities’ obligations, liabilities, and debt further compounds these problems. Studies suggest measures that municipalities and cities can take to weather the storm. This paper focuses on how municipalities can budget for public services.

The national government refocuses allocation to other concerns. Bankruptcy also threatens cities and municipalities. This calls for a reassessment of financial obligations and restructuring deficits. The impacts of the financial crisis still reverberate at all sectors of society. It reached the municipal level. The threat of a crisis to happen again if the economy of China further experience downward spiral only means one thing: municipalities and cities should buckle up to weather the coming storms.

References

Cohen, Natalie. “San Diego City’s Financial Crisis: The Past, Present and Future.” 10 July 2010. Bond Squawk . 28 March 2012 <http://www.bondsquawk.com/2010/06/san-diego-city%E2%80%99s-financial-crisis-the-past-present-and-future/>.

Elliot, Larry. “China’s collapse ‘will bring economic crisis to climax in 2012’.” 11 January 2012. The Guardian. 28 March 2012 <http://www.guardian.co.uk/business/2012/jan/11/china-economic-collapse-global-crisis>.

GWI. “Financial crisis eats away at municipal budgets.” February 2008. Global Water Intelligence. 28 March 2012 <http://www.globalwaterintel.com/archive/9/2/general/financial-crisis-eats-away-at-municipal-budgets.html>.

Paulais, Thierry. Local governments and the financial crisis: an analysis. Washington, D.C.: Citties Alliance, 2009.

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