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Sub-national Finances and Fiscal Consolidation: Walking on Thin Ice

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  • Camila Vammalle
  • Claudia Hulbert
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    Abstract

    Recent crises and national consolidation packages affected sub-national finances. In many OECD countries, central governments introduced reductions in transfers to sub-national governments, and established expenditure and/or deficit objectives to be met by local or regional authorities. Such measures have reduced the financial room of sub-national governments for implementing key public services or investments. In parallel, borrowing conditions deteriorated for many sub-national governments, as banks and financial markets became increasingly reluctant to lend. Since late 2008, financial markets started discriminating between high- and low-quality SNG bonds, and yields reached record-high levels for sub-national governments perceived as less creditworthy. Facing degraded finances, upward pressure on expenditures and deteriorated borrowing conditions, many sub-national governments have used public investment as an adjustment variable to reduce their budget deficits and preserve their spending on welfare, health or education. However, such policies may hinder long-term growth perspectives.

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    Bibliographic Info

    Paper provided by OECD Publishing in its series OECD Regional Development Working Papers with number 2013/2.

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    Date of creation: 11 Mar 2013
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    Handle: RePEc:oec:govaab:2013/2-en

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    Keywords: public debt; sub-national government; bailouts; fiscal stress;

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