Local Government Capital Spending During and After Recessions: A Cause for Concern?

Abstract

This article combines literature on cutback management with the results of a survey of county commissioners. Specifically, it focuses on the use of capital spending reductions in county government to cope with fiscal stress and the potential long-term impact of such reductions in response to the limited amount of research on this form of local government. In light of the literature and survey results, it recommends that county governments change their behavior and avoid cuts to their capital budgets due to the long-term costs of delayed maintenance and the opportunity costs incurred by stifling economic development. It also presents policy choices available to many counties that enable them to maintain capital investments, including public-private partnerships and earmarked local option sales taxes. The study concludes with a call for quantitative research on the long-term effects of capital reductions during economic downturns.

A Systematic Public Capital Management and Budgeting Process

“…Effective long-term capital planning that incorporates strategic and comprehensive planning with needs assessment and long-term fiscal planning should encompass the following activities (Ammar et al, 2001;Ebdon, 2004;Government Performance Project, 2005;National Association of State Budgeting Officers, 1999;2014;Srithongrung, 2006):…”

“…Pagano (1984) and Jacob (2008) suggest that linking capital and operating budgets provides assurance that maintenance funding is undertaken. For example, by using dedicated revenues to finance public facility depreciation, a government will be able to ensure annual appropriation for a regular maintenance schedule (Afonso, 2014).…”

A Local Government Revenue System under Macroeconomic Pressure - The Case of Poland

“…A study of selected US counties showed that capital spending cuts and a reduction in investment activity during and after the recession are the main consequences of a fi nancial crisis (Afonso, 2014). Practice shows that austerity is the preferred instrument for dealing with budget defi cits, but it comes with long-term consequences such as there having to be greater expenditures in the future to maintain obsolete infrastructure or to carry out overhauls and repairs, higher interest rates after the recession, and development and economic growth suff ering from non-investment.…”

Determinants of Debt in Rural Municipalities on the Example of the Warmińsko-Mazurskie Voivodeship

“…This situation is often referred to as fiscal stress [Kloha et al 2005, Maher andDeller 2007]. According to research, the long-term consequences of lower capital spending include slower economic growth [Afonso 2014] and a decrease in the economic performance of municipalities [Arezki and Ismail 2013]. However, these consequences can also be felt at the regional level, and they can compromise the competitiveness of voivodeships because municipalities are burdened with most public tasks relating to, for example, infrastructure development.…”