Changes in the Revenue Autonomy of the Local Government Subsector of the European Union Countries as a Result of the Pandemic Crisis

Abstract

Theoretical background: Intergovernmental relations are a key area of research on fiscal federalism. The extent and strength of central government’s influence on local governments determines the degree of autonomy of local authorities. The prevailing view in the literature is that a higher degree of local government autonomy is a factor that stimulates economic growth, fiscal stability, and efficient delivery of public goods. At the same time, the COVID-19 pandemic period forced the need for coordination between central government and subnational authorities. Under such conditions, significant changes occurred in the size and structure of local government budgets, which were the result of greater interconnection of local government finances with transfers from central government. These changes meant pressure to reduce the revenue autonomy of local governments. In view of this, the article formulates a research hypothesis that the degree of revenue autonomy of local governments decreased during the pandemic period.

Purpose of the article: The purpose of the article is to determine the direction and strength of changes in the level of local government subsector revenue autonomy in European Union countries.

Research methods: The research used data for 2012–2022 from the Government Finance Statistics Database published by Eurostat. The values of three indicators for European Union countries determining the degree of revenue autonomy of local governments were compared: 1) the share of local governments’ transfer revenues in their total revenues; 2) the share of local governments’ own (non-transfer) revenues in general government sector revenues; 3) the share of local tax revenues in total taxation. In addition, the statistical significance of the differences in the studied indicators between the individual years of the study period was tested using a paired sample t-test (for the first indicator) and a non-parametric Wilcoxon signed rank test (of the other two indicators).

Main findings: It was shown that the COVID-19 pandemic period was only to some extent a factor in changing the revenue structure of the local government. The biggest influence on the changes in this structure came from transfers received from the central government, the importance of which did increase in the years preceding the pandemic period, but the increase from year to year was small and statistically insignificant. Indeed, it was only the pandemic crisis that caused significant statistical changes in this regard. In the case of the ratio of the share of local own revenue in general government revenue, it turned out that only to a small extent was the pandemic crisis the source of the reduction in the role of local revenue in the general government sector. No significant changes in the role of local government taxes in the tax revenues of the sector as a whole were also seen. For this indicator, there was no evidence of statistically significant differences in the values of this indicator during the COVID-19 pandemic period relative to the pandemic period. Similarities were also found in the direction of change of the first two indicators relative to the average for European Union states.