An Evaluation of the Economic and Financial Crisis's Impact on Local Budgetary Aggregates: The Romanian Case Academic research paper on "Economics and business"

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Procedia Economics and Finance 20 (2015) 467 - 477

7th International Conference on Globalization and Higher Education in Economics and Business

Administration, GEBA 2013

An evaluation of the economic and financial crisis's impact on local budgetary aggregates: the Romanian case

Florin Opreaa, Irina Bilanb*

a'b "Al. I. Cuza" University of Iasi, Bd. Carol I no. 11, lasi 700505, Romania

Abstract

Under circumstances of economic and financial crisis, a deterioration in the budgetary position of both central and local governments occurs, although the latter are assigned, to a greater extent, with revenues from taxes with a stable taxable base (such as property taxes). At the same time, measures designed to counter the effects of the crisis should be promoted by both the central government, which traditionally performs the task of macro stabilization, and the local governments which, considering the responsibilities assigned to them and the local dimensions of the crisis, should supplement central government's efforts and support for the occurrence of the expected positive effects. In order to outline some possible courses of action, it is, however, necessary to perform a careful analysis of the effects of the crisis on local governments' revenues and expenditures. This is only rarely assumed in the literature (especially for the case of Romania), often concerned with the issue of the central budget. On these grounds, this paper aims to provide, based on the analysis of data coming from Eurostat, the Romanian Ministry of Public Finance, the Romanian National Institute of Statistics and the Fiscal Council, a detailed assessment of the effects of the crisis on the revenues, expenditures, budget balance and debt of Romanian local governments, highlighting their peculiarities in relation to the effects recorded by the theory or by other Central and Eastern European countries. The paper also aims, by analyzing the changes recorded in the structure of Romanian local budget revenues and expenditures, to assess the rationality of the measures adopted at local level during the crisis, as well as their compatibility with the objectives of economic stabilization and long-term economic growth, suggesting, when appropriate, some alternative viable solutions.

© 2015 TheAuthors. PublishedbyElsevierB.V.This is an open access article under the CC BY-NC-ND license (http://creativecommons.Org/licenses/by-nc-nd/4.0/).

Peer-reviewunderresponsibility of the Faculty of Economics and Business Administration, Alexandru loan Cuza University of Iasi. Keywords:local governments; budgetary revenues; budgetary expenditures; public debt; anti-crisis strategies

* Corresponding author. Tel.: +40-232-201-440; fax: +40-232-201-433. E-mail address: irina.bilan@uaic.ro

2212-5671 © 2015 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license (http://creativecommons.Org/licenses/by-nc-nd/4.0/).

Peer-review under responsibility of the Faculty of Economics and Business Administration, Alexandru loan Cuza University of Iasi. doi: 10.1016/S2212-5671 (15)00098-2

1. Introduction

The impact of the global economic and financial crisis emerging in 2008 was quite strongly felt, from an economic point of view, in the affected countries, causing additional pressure on their public finances, which added to that entailed by other formerly known factors, such as the type of fiscal policy promoted by national governments, the ageing of population etc. On the background of decreasing GDP and exports and increasing unemployment, it was only natural to expect that public expenditures for economic stabilization/growth would increase, while tax revenues would reduce. An appropriate public (mainly budgetary) policy response aimed at countering the effects of the crisis should have been rationally configured in two main respects: by correlating the specific measures undertaken to the specific determinants of the economic and financial turmoil, and the level of action (and decision) to the one where the problems are recorded. From this point of view, critical economic times are typically characterized from a macroeconomic perspective (i.e. of the consolidated public budget), thus insinuating a strong emphasis on the role of central authorities in crisis management, although it must be rationally accepted that "governance" is an activity carried out throughout the whole country, including at the level of local, autonomous administrative communities. It advocates, in this respect, not only the legal setting of administrative autonomy attribute, but also the reality that local autonomy finds its financial support (often very consistent) in transfers from the central government budgets, as well as the fact that crisis manifestation is different from one local community to another, thus calling for different public policy responses. Moreover, it is also noted in the literature the imperative for local actors to take action and counter the effects of the crisis, complementary to central governments' actions, although the economic and financial levers support, at this level, some specific conditionings.

Given that previous research on the impact of the crisis is mainly focused on the macroeconomic level of analysis and deals with the need and ability of central authorities to fight against it, this paper proposes a complementary, absolutely necessary perspective of analysis (based on relevant data from Eurostat and national institutions) of the impact of the crisis on local budgetary aggregates, identifying the causes of the observed evolutions and making some proposals for rationalization and strengthening of the policies pursued for stabilization/growth. In order to provide a broader perspective on Romania's situation, we have also considered, at some points, the situation of other Central and Eastern European countries.

2. Local public finance in times of crisis - some theoretical considerations

The overall budgetary revenues and expenditures have the capacity to reflect, by their dimension, structure and dynamics, both the basic guidelines of public authorities' financial policy and the objective or subjective constraints that may act at one moment in time. It must be admitted, however, that the influence factors and interpretations for each of the public budgets can bear different meanings, justified by the inherent differences concerning the mission of the components under consideration, the administrative level at which they may be found, the competence of the authorities managing them or the specific regulations that govern them. For example, the causes and significance of a negative budget balance should be differently interpreted in the case of the state budget compared to local budgets, the latter being subject to a legal regulation imposing the annual equilibrium between ordinary revenues and expenditures, obtained, if necessary, by means of transfers from the central budget, which will, thus, basically reflect a deficit at the level of local budgets. A careful consideration of such causalities becomes indispensable in times of crisis, as the correct identification of the causes of disequilibrium conditions the effectiveness of public policy reactions.

In times of economic and financial crisis, not only central governments but also state or local ones may experience a deterioration in their financial position, the literature (Paulais, 2009; Nickson, 2010; Staehr, 2010; United Cities and Local Governments, 2009; Everatt et al. 2009) highlighting, based on recent or past experiences of various countries, several possible channels through which such effects may arise:

• reduced fiscal revenues, especially there where local taxes are based on less stable tax basis. The effect is equally specific to central governments, but its intensity is expected to be different at the level of local governments, since the tax base of local taxes is in principle (at least in part, in the case of property taxes), less sensitive to the changes in economic circumstances. If, however, the so-called „immovable" local tax base generates a low share of the overall local budget revenues in relation to the interadministrative transfers and the income and capital

taxes (less sensitive to the economic conjuncture), the impact is stronger, entailing a greater pressure on equilibrium between local revenues and expenditures;

• reduced transferred resources from the level of other public administrations, mainly central governments, on the background of the financial difficulties that they, at their turn, may record, calling for fiscal consolidation measures. This phenomenon becomes possible especially in the case of ad-hoc type transfers (based on discretionary decisions), but it can also occur through legislative reconsiderations of the base or proportions of transferred resources;

• reduced access to bank credits and financial markets and higher financing costs, due to both the lack of liquidity on the market, banks' reluctance to lending and increasing investors' risk aversion; this could lead not only to a smaller amount of borrowed resources available for new or old projects but also, in some cases, even to the insolvency of local governments;

• reduced income or even losses from the financial assets held by local governments, there where local authorities are permitted to invest funds in the market;

• increased demand for social benefits due to reduced economic activity and corresponding increase in unemployment, with negative impact on the size of local government expenditures;

• cancellation or postponement of projects developed in partnership with private agents, due to the financial difficulties that they, at their turn, may register.

Also, in times of economic and financial crisis, public authorities are directly responsible for the development and implementation of strategies aimed at helping the economy in trouble recover. Although the task of economic stabilization is most often attributed to central governments, it is generally admitted that a coherent anti-crisis strategy should also take into account the complementary contribution of subnational governments. Accordingly to the recommendations of the Council of European Municipalities and Regions (2009), "a comprehensive economic recovery cannot be initiated without the involvement of Europe's towns and regions".

Two arguments can be put forward in this respect. First, some important engines of economic growth may be found locally and local public authorities are responsible for performing a wide range of activities with direct impact on the overall growth and development of the economy, such as local infrastructures. Secondly, the effects of the crisis were often felt differently at territorial level, which calls for locally differentiated compensating actions, both as magnitude and content.

■ counties with GDP growth rates of less than -10%

■ counties with GDP growth rates between -10% and -5%

■ counties with GDP growth rates between -5% and 0% _m counties with GDP growth rates ofmore thanO%_

Source: the authors, data from Eurostat Fig 1. Distribution of Romanian counties by the average annual GDP growth rate, between 2008 and 2010

A simple look at the effects of the economic crisis on the dynamics of territorial GDP in Romania (figure 1) confirms this situation, the average annual GDP growth rate, between 2008 and 2010, varying substantially between different Romanian counties, from -10.6% in Prahova to 14.8% in Giurgiu.

3. The impact of the economic crisis on the ordinary revenues of Romanian local budgets

On the background of the international economic crisis, the effects of which were recorded in Romania too since 2009, local public authorities were confronted with a reduction in their budgetary revenues growth rate. It can be noted, from figure 2, that this effect was especially strong in 2009, when the recorded annual growth rate was of only 2.3%. If we refer to the pre-crisis period, the difference is obvious, the total decrease in the growth rate being of more than 30%. Although the assessment of local revenues dynamics by their weight in GDP would induce the idea of some growth between 2008 and 2010, we must notice that the increase is mainly due to the decrease of GDP as reporting basis, on the background of the crisis. This situation is not particular to Romania, a much lower average growth rate (even negative in 2009) of local revenues, compared to the pre-crisis period, being recorded in overall CEE countries.

35 30 25 20 15 10 5 0 -5 -10

2007 2008 2009 2010 2011 2012 8,5 average local budget revenues in CEE

-5,4 -1,4 countries* (% of GDP)(right axis) 8

10,5 10

annual growth rate of local budget revenues in Romania (%) (left axis)

average annual growth rate of local budget revenues in CEE countries* (%) (left axis)

local budget revenues in Romania (% of GDP) (right axis)

*the averages were computed for the following CEE countries: Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia

Source: the authors, data from the Romanian Ministry of Public Finance and Eurostat

Fig 2. The dynamics of local budget revenues in Romania and other Central and Eastern European countries

This situation must be carefully analyzed, by also referring to different categories of budgetary revenues, in order to identify the most sensitive ones. Thus, when analyzing the structure of local revenues, we find that the impact of the crisis on fiscal revenues was rather severe, these revenues decreasing continuously from 2008 until 2011, with over 4 billion lei (about 12% of the baseline level). The explanation may consist in the higher sensitivity of these revenues to the economic conjuncture and the fiscal consolidation measures promoted by the central government.

Table 1. The composition of local budget revenues in Romania (billion lei)

Revenues 2007 2008 2009 2010 2011 2012

Fiscal revenues, out of which: 30.1 37.6 36.7 34.5 33.0 34.4

Taxes on income 11.7 14.4 15.0 14.5 14.5 14.1

Taxes on goods and services 15.4 19.8 18.2 16.1 14.4 16.2

Property taxes 2.9 3.3 3.3 3.8 4.0 4.1

Non-fiscal revenues 1.3 2.8 4.0 7.4 9.1 10.1

Subsidies 4.7 4.2 4.4 5.3 5.7 4.7

Amounts received from EU - - 0.7 2.3 3.5 3.9

Other revenues 0.4 1.1 1.0 3.5 3.9 0.3

Total 36.8 45.7 46.8 50.0 51.9 53.4

Source: the authors, data from the Romanian Ministry of Public Finance

From the data reflected in table 1 it can be noticed that the taxes on property (buildings, land, vehicles, etc.), based on safer and less sensitive to economic situation tax basis, represent only a small share of the total budgetary revenues of Romanian local governments, less than 10%. Thus, given the enforced system of establishing these local taxes in Romania, which takes into account to a lesser extent the fluctuating market value of movable and immovable property and relies to a greater extent on other, more stable indicators such as the surface of buildings or the engine capacity of vehicles, revenues from property taxes have steadily risen, even on the background of the crisis (from 2.9 billion lei in 2007 to 4.1 billion lei in 2012, with over 40%). However, the effect was insufficient to fully compensate for the reduction in other fiscal revenues, thus suggesting some kind of fragility of the local tax base, which should be taken into consideration when designing future structural reforms.

20 15 10 5 0

18,4 18,5 179 18,8

14,2 15 14,3 14,2

overall personal incometax revenues

quotas broken down from personal income tax to local governments

2007 2008 2009 2010 2011

Source: the authors, data from the Romanian National Institute of Statistics Fig 3. Overall personal income tax revenues and amounts and quotas broken down from personal income tax to local governments (billion lei)

Against the background of rising unemployment and reducing personal income and corporations' profits, the decrease in local budget revenues from income tax (from 15.0 billion lei in 2009 to 14.5 billion lei in 2011) appears to be a natural result of the economic downturn. The adverse impact of the crisis on local budgets was, however, enhanced by the consolidation measures adopted by central authorities, which decided to successively reduce the quotas broken down from personal income tax allocated to local budgets (as the main component of local taxes on income) from 82% to 77% in January 2011 and 71.5% in December 2011, depriving local authorities of significant financial resources. Thus, as can be seen in figure 3, although the overall revenues collected from personal income tax increased in 2011 compared to 2010, the impact on local revenues continued to be a negative one, trend which extended to 2012. These reconsiderations adversely affected the predictability of local revenues (which had, in principle, been stabilized by enacting the quotas to be used under the administrative transfer system), with direct impact on the volume of local investment projects, generating additional income, jobs etc.

Source: the authors, data from the Romanian National Institute of Statistics Fig 4. Overall revenues from VAT and amounts deducted from VAT for local governments (billion lei)

The most important contribution to the reduction in local governments' tax revenues came from the taxes on goods and services (mainly VAT), which decreased from 19.8 billion lei in 2008 to 14.4 billion lei in 2011, with over 25% (table 1). Paradoxically, this effect occurred even against the controversial measure, in force since July 2010, to increase, in times of crisis and contrary to the conventional wisdom calling for tax cuts, the standard VAT rate from 19% to 24%, measure that should have led to a substantial increase in indirect tax revenues, but rather led to a higher VAT collecting inefficiency ratio (Fiscal Council, 2012). Although, as can be found in figure 4, such an increase of the overall VAT revenues raised to the central budget occurred, as it rose by nearly 40% in absolute figures in 2011 compared to 2009, this increase was not transmitted to local budgets due to the decision to constantly amputate the amounts deducted from VAT allocated to local communities, which decreased by almost 25% during the same 2 years timeframe. The effects are even more unfavorable as part of these revenues serves to the direct funding of expenditures with high impact on the future development of local communities and the nation as a whole, such as expenditures for roads or development of infrastructure in rural areas. Although the main reason for the reduction of VAT transfers was the lower receipts, it is necessary to note that the discretionary setting, by central authorities, of the amounts deducted from VAT to local governments, should be reconsidered by introducing pre-set formula, not only to avoid such situations, but also to counter any privileging of communities based on political criteria (Iorga et al., 2010).

Compensating favorable effects on local budget revenues came from subsidies, mainly from the state budget, which increased by 1.5 billion lei from 2008 to 2011, and the amounts received from EU, either as refunds on previous expenditures or pre-financing of EU projects, which increased by 3.2 billion lei from 2009 to 2012 (table 1). Basically, confronted with tax revenue shortfalls and benefiting from increased expertise in managing European projects, local authorities turned to a greater extent to the non-refundable resources from EU funds and programs to ensure the financing of local development projects. However, compared to other CEE countries, the absorption rate is still quite low in Romania (Fiscal Council, 2012), which indicates the imperative of developing this source of funding, by reducing bureaucracy, providing sufficient resources for co or pre-financing etc. Local borrowing, with or without the guarantee of central government, might prove to be a good option, especially since the rules limiting the access to new local public borrowing, by the Law no. 272/2006 on local public finance, do not apply for loans aimed at co-financing or pre-financing projects benefiting from EU's financial assistance.

4. The impact of the economic crisis on the expenditures of Romanian local budgets

Referring to local public expenditures, although they were expected to increase in times of recession, due to both the cyclical evolution of expenses sensitive to economic conditions (such as social protection ones) and to the economic stabilization measures that could and should be adopted not only by central but also by sub-national governments, this evolution was not confirmed for Central and Eastern European countries, as can be noted from the

data presented in figure 5. The above findings could mean that, facing diminishing financial resources, local authorities were effectively constrained to restrict public spending, the role they were assigned in national anti-crisis strategies being rather a modest one. This reaction was also driven, in most countries (among them Latvia, Estonia, Hungary, Lithuania, Slovakia etc.), by the existence of numerical fiscal rules applicable to local governments and forcing them to practice balanced or surplus budgets or limiting their access to alternative financial resources, such as loans. Also, in some countries, once budgetary consolidation strategies aimed at reducing overall budget deficits and ensuring public debt sustainability were launched, constraints became even more severe, as local governments benefited from diminished central government financial support.

For the particular case of Romania, the data summarized in figure 5 reveal similar developments to other Central and Eastern European countries. There can be noticed a strong contraction of the growth pace of local government spending in 2009, while the ratio of local expenditures to GDP continued to increase (although not significantly) compared to the previous period. After 2010, the fiscal consolidation (austerity) measures promoted by central authorities were correspondingly reflected in a reduction of the share of local public spending in GDP, while the annual growth rate of local expenditures slightly recovered in 2011 (but later on, in 2012, the recorded annual growth rate was a negative one).

50 40 30 20 10 0 -10

2007 2008 2009 2010 2011 2012

12 10 8 6 4 2 0

annual growth rate of local budget expenditures in Romania (%) (left axis)

average annual growth rate oflocal budget expenditures in CEE countries* (%) (left axis)

local budget expenditures in Romania (% of GDP) (right axis)

average local budget expenditures in CEE countries* (% of GDP) (right axis)

*the averages were computed for the following CEE countries: Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia

Source: the authors, data from the Romanian Ministry of Public Finance and Eurostat

Fig 5. The dynamics of local budget expenditures in Romania and other Central and Eastern European countries

Considering the structure of local budget expenditures from a functional perspective, our previous studies (Bilan, 2013) proved that public authorities kept under reasonable control the most sensitive categories (for example, social security and social assistance expenditures), some of them even reducing compared to the pre-crisis period (2008). Major efforts have been undertaken in relation to general public services, defense and public order and security expenditures, which were reduced, thus allowing for some increases of expenditures considered more important for growth (such as those with economic affairs or development, housing and water supply). In these areas, an important contribution came from EU grants, although a more consistent use of these nonrefundable financial resources should still be a priority for the years to come. However, the decision to reduce local public spending on education is disputable, since pre-university education financing in Romania is ensured, for the most part, at the level of local communities, from the shared amounts of certain state budget revenues (personal income tax before 2011 and VAT afterwards). The reduction of financial resources redistributed to local authorities by such means effectively passed on the availability of resources for education, an underfunded sector compared not only to other sectors but also the actual financing needs. The decision is even more disputable as it is generally recognized the critical role of such expenditures, together with the research, development and environment ones, in shaping a "smart" budgetary strategy, aiming at long-term economic growth and development (Oprea and Bilan, 2013; Kenneth, 2012).

Table 2. The economic composition of local budget expenditures in Romania (billion lei)

Expenditures 2007 2008 2009 2010 2011 2012

Current expenditures, out of which: 26.8 36.1 37.5 39.9 41.8 45.1

Compensation of employees 11.1 17.1 18.0 16.7 15.6 16.4

Goods and services 7.6 11.0 10.4 11.9 13.4 15.1

Social assistance 2.7 3.2 3.1 3.5 3.0 3.1

Capital expenditures 6.9 13.1 11.4 10.3 10.6 10.2

Other expenditures 0.2 0.2 0.2 0.4 1.0 1.0

Total 33.9 49.4 49.1 50.6 53.1 56.1

Source: the authors, data from the Romanian Ministry of Public Finance

The changes in the economic composition of local budget expenditures in Romania, over the last years, largely confirm the previously observed trends (table 2). Although local spending on social assistance rose in 2010, against the backdrop of the deteriorating financial situation of many people and the increased number of social assistance beneficiaries, the trend reversed in 2011, while public spending on the compensation of employees decreased successively in 2010 and 2011, due to both public sector layoffs and public wage cuts or the removal of some bonuses and other benefits. Although the content of such measures is to be appreciated, the inconsistency and incoherence of their implementation allowed for some affected public employees to contest them within the courts of law and win. The rescheduling of resulting financial liabilities will lead to additional budgetary efforts in the coming years, when these obligations are due, trend that may already be found in 2012. At the opposite side, spending on goods and services rose quite sharply after 2009, thus offsetting, to a large extent, the reductions in other categories of budgetary expenditures.

Regarding capital expenditures, usually appreciated to be essential for ensuring balanced economic growth and reducing local development disparities, a rational approach would have required for them to rise in times of economic crisis. However, after 2008 (with the only exception of 2011), they experienced a general downward trend, similarly to some other European Union member states where public investment expenditures were sacrificed in the context of budgetary consolidation strategies. This situation can be attributed, at least in part, as we shall further see, to the diminished access of Romanian local authorities to loan resources, used (as the law stipulates) only to finance public investment spending.

5. The impact of the economic crisis on the budget balance and public debt of Romanian local governments

Facing the pressure resulting from the discrepancies registered between the evolution of main local budgetary aggregates (local revenues and expenditures), public authorities were virtually forced to accept negative budget balances, as can be seen from table 3. Although the proportions of deficits are not, at least at first sight, excessively high, it must be noticed that the numbers do not fully reflect the alarming economic and financial situation, especially when it comes to budgetary arrears. Their high volume even resulted in changes to the legal regime of local public finances in Romania, on issues of local borrowing (the prohibition of access to loan resources for local governments registering arrears) or insolvency of administrative-territorial units. A global perspective shows that the accumulation of budgetary arrears, meaning more important real local deficits, has triggered, to a certain extent, a vicious circle, on the one hand the access to local borrowing being limited if there were premises of insolvency, but, on the other hand, the removing of those premises (the payment of arrears) depending on the possibility of local authorities to borrow. Although the elimination of arrears was explicitly assumed as government policy target and imposed as objective to local authorities, sometimes with financial support from the central budget, the results were not the expected ones, as proven by the data in table 3.

Table 3. Local budget deficit and local public debt in Romania

Year_2007 2008 2009_2010_2011_2012

Deficit/surplus of the centralized budget of the administrative- 2871.7 -3697.9 -2330.8 -612.8 -1200.3 -2639.1

territorial units (million lei)

Deficit/surplus of the centralized budget of the administrative- 0.7 -0.7 -0.5 -0.1 -0.2 -0.5

territorial units (% of GDP)

Local budgetary arrears (million lei) 2171 1758 1651 1380 1922

Local public debt (million lei), out of which: 6174.7 9238.7 10835.2 11948.9 12866.6 13857.2

Direct local public debt (million lei) 5606.1 8530.8 10090.2 11065.8 12186.8 13209.9

Guaranteed local public debt (million lei) 568.6 707.9 745.0 883.1 679.8 647.3

Local public debt (% of GDP) 1.5 1.8 2.2 2.3 2.3 2.4

Annual growth rate of local public debt (%) 77.8 49.6 17.2 10.3 7.7 7.7

Source: the authors, data from the Romanian Ministry of Public Finance and the Fiscal Council

More importantly, however, limiting the access to loans for local authorities recording payment arrears obscured an important channel for financing local development, thus affecting the premises of future growth and of closing the vicious circle previously invoked, while simultaneously generating more pressure on the central budget through the need for further financial transfers (with a direct impact on the general government deficit).

Regarding local public debt, the analyzed data mainly highlight a substantial reduction of its annual growth pace after 2009, explained by the prohibition of access to loan resources for local authorities registering budgetary arrears, the greater prudence of central authorities in authorizing local borrowing, as well as by the reduced indebtedness capacity of local authorities. In this latter respect, acted as inhibitors both the fixing of local indebtedness limit in relation to local budget revenues (local public debt service should not surpass 30% of the average, determined for the last three years, of local governments 'own incomes minus capital revenues - the reduced incomes basically decreased the indebtedness capacity of local governments) and the fragility of the fiscal potential, which has made its mark on the credibility of potential local borrowers.

Another factor with impact on the proportions of loan resources use was the diminishing access of local governments to financial markets. In this context, it becomes relevant to analyze the changes registered in the structure of local government debt, highlighting, as depicted by the data in figure 6, a diminishing share of the debt contracted by ways of issuing securities and "other instruments" (such as supplier credit or financial lease), on the account of increasing the share of debt resulting from bank loans.

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

6,2 6,4 6,3 4,9

other instruments (supplier credit, financial lease) (% of directlocal public debt)

bank loans (% of direct local public debt)

municipal securities (% of direct local public debt)

2007 2008 2009 2010 2011

Source: the authors, data from the General accounts of direct local public debt (2007-2011) provided by the Romanian Ministry of Public Finance Fig 6. The decomposition of the direct public debt of Romanian local governments by instruments

From the perspective of government financial policy decisions that would target repositioning local authorities as active agents of development, the analysis should also be customized by reference to different types or tiers of local communities since, as we have already shown in our previous research, there are major differences between the legal and actual indebtedness capacity of some local units (Oprea and Bilan, 2011).

The weakening of the overall local economic and financial potential also had negative repercussions on the degree of local authority's involvement in supporting the actions of economic agents of local importance or

subordination, as revealed by the evolution of the guaranteed local public debt. As the data summarized in table 3 show, the initial efforts of local authorities (between 2009 and 2010) diminished in the coming years, as their financial capacity reduced.

6. Conclusions

The effects of the economic and financial crisis were felt, as expected, in Romania, both at the level of central government and local governments' budgets. The analysis conducted on the impact of the crisis on local budget ordinary revenues lead to the conclusion that the negative effects did not come only from the direct impact of economic recession, but mainly from the discretionary measures adopted by central government. In the context of the budgetary consolidation strategy initiated in 2010, it successively amputated the revenues assigned to local governments as quotas and amounts deducted from personal income tax and VAT, thus depriving local authorities of important financial resources. The discretionary change in the quotas from personal income tax used for sizing financial transfers to local governments was, to some extent, an objectionable measure, affecting the predictability of local budget revenues, with direct impact on the volume of new investment projects, absolutely necessary given the circumstances. The structural analysis of local budget revenues revealed a certain fragility of the local tax base, which does not have the adequate capacity to ensure the stability of budget receipts, being therefore necessary to rethink the way sources of income are attributed to central or local authorities, as well as to reconsider the tax base of some local taxes.

As for local public spending, although Romanian local authorities were effectively forced, just like in other countries, to operate expenditure cuts in order adjust them to smaller revenues, the overall change was quite small. Basically, the reduction of some categories of expenditures, like the ones with the compensation of employees, was largely offset by the increase of others, such as the expenditures on goods and services. Also, the structural readjustments proved to have significant shortcomings, some measures being inconsistent with the objective of economic growth. It may be disputed, in this respect, the decision to cut some expenditure items such as on education, a real investment in human capital with long-term impact and a valued component, in our opinion, of a smart economic growth strategy.

Considering Romania's conditions, a more careful and timely assessment of the real need for social assistance would have been desirable, allowing for some important financial resources to be retrieved from this destination and used for local economic growth purposes. Also, the amendments made to local indebtedness' legal framework should have taken into consideration the real potential of local communities, thereby avoiding the situation when for some of them the legal indebtedness limit acts as an undesirable real obstacle, while for others it creates a practically useless room for maneuver.

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