The fiscal pressures on Europe’s regional and local governments (RLGs) will increase because of the Coronavirus crisis, but the effects will be uneven, both between and within countries, Moody’s Investors Service said in a report.
Spending pressures will be particularly high for RLGs in Germany, given responsibilities for economic development, and in Spain and the UK, given significant spending on health and social care.
In addition, significant regional inequalities across the UK, combined with the disproportionate impact of the virus on more deprived areas, are likely to lead to more acute fiscal pressures on poorer UK local authorities.
“RLGs will be hit harder if they are responsible for key pandemic-related spendings such as health and social care, and if they depend on locally generated revenues and vulnerable sectors such as international tourism,” said Zoe Jankel, VP-Senior Analyst at Moody’s.
“Although national governments are giving RLGs extra cash in the current fiscal year, the main drivers of RLGs’ fiscal resilience in the longer term will be their pre-pandemic fiscal strength and the flexibility of fiscal frameworks.
“RLGs in UK, Italy, and Spain have the greatest exposure to sectors vulnerable to the Coronavirus-related economic contraction. These include construction, wholesale and retail trades, transport, accommodation and food services, and leisure and entertainment. We estimate an overall revenue shortfall of €77 billion for RLGs across the big five European economies in 2020-21.
“We expect pandemic-related fiscal pressures to be greatest for German Laender, Spanish regions and UK local authorities. However, the strong pre-pandemic fiscal positions of Laender will act as a buffer, whereas Spanish regions and UK local authorities will be more exposed,” it said.