Local Finance for Regional Development?

While we are all very conscious of the centralised nature of government in Ireland it is interesting to compare the levels and types of funding for local services, investment and development available here and in other OECD countries.   The availability of local government finance is an important  prerequisite for bottom up regional development initiatives.

In the recently published OECD Regions at a Glance 2016, one chapter focuses on ‘Subnational Government Finance for Regional Development’ and examines the type of spending and investment, revenues and responsibilities at regional and local (or subnational) levels.

The term subnational government is not one we would commonly use in Ireland (the OECD term covers federal, regional and local government) as local government is practically the only form of subnational government.  However, for consistency with the OECD, and for comparison with OECD members, in this post the term subnational government (SNG) is used.

Subnational government spending in the OECD

Subnational government expenditure in the OECD as a whole in 2014 accounted for 17% of OECD members GDP and 40% of total public expenditure.  The average SNG per capita expenditure was $6,450.  Figures for Ireland differ significantly from this, with no federal level, very limited regional government expenditure (except through the regional assemblies) and  limited responsibility and spending by  local government.  In Ireland 9.4% of total public expenditure is by SNG and this amounted to $1,780 per capita while public expenditure as a whole was $18,895 per capita in 2014.

In other countries in the last twenty years (1995-2014) there has been a trend towards decentralisation (to local government) and a transfer of responsibility for sectors such as education, health, social protection and economic development to SNG level.  In contrast, in Ireland there has been a fall in SNG expenditure of as a percentage of total public expenditure (-9.5%) and a fall of 2.7% as a percentage of GDP and so a trend to recentralisation of expenditure.

Spending by economic function

Ireland SNG expenditure shows a very different pattern of spending by economic function to that in many other OECD countries, in part as a consequence of the limited functions of SNG.

Looking at subnational expenditure by economic function indicates the importance of SNGs in each area (these figures are for 2013).  Overall for OECD countries Education and Health represent the major sectors of SNG expenditure (on average 25% of SNG expenditure is on Education and 17% for Health.  In Ireland education accounts for 13% of expenditure.

In Ireland what is termed economic affairs expenditure (transport, communications and economic interventions) account for 22% compared to 14% for the OECD as a whole, though it should again be remembered that this is a larger proportion of a relatively small overall expenditure.

Housing and community amenities also accounted for a higher proportion of the SNG expenditure in Ireland (15 %) compared to 3% for the OECD as a whole.  This includes functions such as supply of potable water, public lighting and housing.  In future with the establishment of Irish Water and the centralising of this expenditure this figure is likely to fall.

Finally, and perhaps surprisingly, environmental protection accounted for 12% of SNG expenditure in Ireland compare to 2.6% for the OECD 28[1].

Subnational government investment

In most OECD countries SNGs play a key role in public investment (in federal countries in particular), but while SNG investment was 1.9% of GDP  in the OECD34 and SNGs accounted for 59% of this (53% in the EU28) but in Ireland SNG investment is 0.7%  of GDP and 37 % of public investment.   SNG investment in Ireland was $365 per capita (of $980 total public investment per capita) compared to SNG investment of $730 in the OECD34.

Economic Affairs accounted for more than 45% of such investment (See Figure 1 below) and was relatively higher than the EU and OECD average.  Transport (road, railway and other transport options) account for most of this.

Figure 1: Types of sub national investment in Ireland, EU and OECD 2013

SNG investmentSource: OECD regions at a glance Fig. 3.12 1 2 http://dx.doi.org/10.1787/888933363696

The average annual change in SNG investment in Ireland between 2007 and 2014 is a dramatic illustration of the impact of the economic crisis on investment.  SNG investment in Ireland fell by 16.7% while the OECD as a whole remained relatively stable, and there was a fall in the EU of 1.6% (see Figure 2).

Figure 2: Annual average change in subnational government investment between 2007 and 2014

change in SNG invSource: OECD regions at a glance Fig. 3.111 2 http://dx.doi.org/10.1787/888933363685

Subnational Revenue and Debt

The two main sources of SNG revenue are taxes and grants and subsidies.  In Ireland taxes accounted for 20% of SNG revenue (44% in OECD33) while grants and subsidies accounted for 50% of revenue in Ireland (37% OECD).  Other revenue sources include local public service charges and property taxes.

Local government in Ireland has relatively low levels of debt, accounting for only 3.1% of total public debt compared to 16% in the EU28 and 24% in the OECD 32.  Most of this debt in Ireland is in the form of loans (81%).

Conclusion

While there is an on-going discourse in regional development analysis and policy on regions making the most of their assets and opportunities and on ‘bottom up’ drives for change, the very low levels of funding available at local and regional government level in Ireland to invest and drive regional development goals, which have been locally developed, is clearly a difficulty.  On the more positive side, much of the sub national funding for expenditure and investment is at least currently focused on economic development initiatives.

Helen McHenry

[1] OECD country numbers vary according to the availability of data.  In most cases the largest available has been chosen for comparison.

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About WDC Insights

WDC Insights is the blog of the Western Development Commission Policy Analysis Team. The WDC Policy Analysis team analyses regional and rural issues, suggests solutions to regional difficulties and provides a regional perspective on national policy objectives. Policy Analysis Team Members are: Deirdre Frost, Helen McHenry and Pauline White. We will all be posting here. You can contact us here, or use our firstnamelastname at wdc.ie Follow us on Twitter @WDCInsights
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