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Local Public Finance and Public Investment during the economic crisis
Giuseppe F. Gori, Patrizia La<arulo
Workshop AISRE-‐ABC La fronGera del dibaHto in Economia Regionale e Urbana
Politecnico di Milano, 6 March 2015
Factsheet 1 WHY DOES THE EU NEED AN INVESTMENT PLAN?
Since the global economic and financial crisis, the EU has been suffering from low levels of investment. Collective and coordinated efforts at European level are needed to reverse this downward trend and put Europe firmly on the path of economic recovery.
What is the current investment situation?
The European Commission's most recent economic forecasts showed that weak investment has led to a fragile recovery from the economic crisis in the EU and even more so in the euro area. While Gross Domestic Product (GDP) and private consumption in the EU were in the second quarter of 2014 roughly at the same level as in 2007, total investment was about 15% below 2007 figures. In certain Member States, the decline in investment has been even more dramatic.
Compared to the 2007 peak, investments have dropped by around € 430 billion. Five Member States (France, the United Kingdom, Greece, Italy and Spain) account for around 75% of the drop, owing to the size of their economy or the sheer magnitude of the investment drop, or both.
Real gross fixed capital formation by Member State Index 2007=100
Prolonged deep decline
Member States with biggest drop in investmentE.g., Greece, Ireland, Italy, Portugal, Spain
Shallower double dip (except UK)
Other selected Member States E.g., Belgium, Finland, Germany, Netherlands, UK
Real gross fixed capital formation EU-28, in 2013 prices, € bn
Share of total drop by country EU-28, in percentage*
Share of total drop by sector EU-26, in percentage*
Machinery and equipment (32%) and other (-9%)
Real estate – Non-residential
Real estate – Residential
Factsheet 1 WHY DOES THE EU NEED AN INVESTMENT PLAN?
Since the global economic and financial crisis, the EU has been suffering from low levels of investment. Collective and coordinated efforts at European level are needed to reverse this downward trend and put Europe firmly on the path of economic recovery.
What is the current investment situation?
The European Commission's most recent economic forecasts showed that weak investment has led to a fragile recovery from the economic crisis in the EU and even more so in the euro area. While Gross Domestic Product (GDP) and private consumption in the EU were in the second quarter of 2014 roughly at the same level as in 2007, total investment was about 15% below 2007 figures. In certain Member States, the decline in investment has been even more dramatic.
Compared to the 2007 peak, investments have dropped by around € 430 billion. Five Member States (France, the United Kingdom, Greece, Italy and Spain) account for around 75% of the drop, owing to the size of their economy or the sheer magnitude of the investment drop, or both.
Real gross fixed capital formation by Member State Index 2007=100
Prolonged deep decline
Member States with biggest drop in investmentE.g., Greece, Ireland, Italy, Portugal, Spain
Shallower double dip (except UK)
Other selected Member States E.g., Belgium, Finland, Germany, Netherlands, UK
Real gross fixed capital formation EU-28, in 2013 prices, € bn
Share of total drop by country EU-28, in percentage*
Share of total drop by sector EU-26, in percentage*
Machinery and equipment (32%) and other (-9%)
Real estate – Non-residential
Real estate – Residential
Gross Fixed Capital Forma1on (Private and General Government), % of GDP
0"
5"
10"
15"
20"
25"
Germany" Spain" France" Italy" UK"
Private"200092007"
Private"200892013"
General"Government"200092007"
General"Government"200892013"
11%# 16%# 18%# 15%# 19%#
89%# 84%# 82%# 85%# 81%#
Germany# Spain# France# Italy# UK#
Private#
General#Gov#
Gross Fixed Capital Forma1on (General Government), % of GDP
1.8$
2.3$
2.8$
3.3$
3.8$
4.3$
4.8$
5.3$
2000$ 2001$2002$ 2003$ 2004$ 2005$2006$ 2007$ 2008$ 2009$2010$ 2011$2012$ 2013$
Germany$ Spain$ France$ Italy$ UK$
GFCF, Share of Local Government Investment
42%$
27%$
57%$
65%$
36%$
26%$
57%$55%$
Germany$ Spain$ France$ Italy$
200092007$
200892013$
Local municipali1es have been par1cularly involved in the aggregate debt recovery process
Local MunicipaliGes, revenues and expenditures. Mln Euro.
Current Exp.
Capital Exp.
CG Transfers
Local Taxes
0
60
120
180
240
2008 2009 2010 2011 2012 2013
-‐15
-‐10
-‐5
0
5
Stato EnG previdenziali
Regioni Province Comuni EnG sanitari locali
2010 2011 2012
Fiscal balances by government type. 2010-‐102. %.
Higher fiscal autonomy and Gghter top-‐down spending constraints have improved
local governments balances.
Local municipaliGes and social security insGtuGons have posiGvely contributed to the
naGonal debt recovery process
ISP, Rules
Target = Rcurrent + Rcap – Ecurrent – Ecurr -‐ This is calculated by using a hybrid criterion:
-‐ Cash-‐basis accoun1ng principle for capital expenditure -‐ Accrual accoun1ng principle for current expenditure
-‐ Debt contracted in order to finance public works is not accounted between revenues. -‐ MunicipaliGes usually already have large financial commitments on the current side. -‐ MunicipaliGes cannot pay for planned public works even if they have enough resources.
Financial contribuGon of MunicipaliGes (Euro Mlns). 2010-‐2013.
2010 2011 2012 2013 Target 340 2025 3242 4600 DL 35/2013 “sblocca pagamenG“ -‐3721 VerGcal Pact -‐1195 Transfer cuts (ex D.L. 78/2010) 0 1.500 2.500 2.500 Transfer cuts (ex D.L. 201/2011) 0 0 1.450 1.450 Spending Review 0 0 90 2.250 Total financial contribute 340 3.525 7.282 5.884 % on 2010 current expenditure 0,6 6,6 13,6 11
ISP, the crisis and public investment
Capital expenditure, payments and financial commitments. 2005-‐2013.
150
200
250
300
350
400
450
500
2007 2008 2009 2010 2011 2012 2013 2014
Impegni
PagamenG
-‐ ISP largely contributes to the investment drop. -‐ It acts on payments but also on financial commitments. -‐ The crisis reduces capital revenues: hard to profitably dismiss public buidings, lower revenues from
urbanisaGon taxes and construcGon permits. -‐ The 2015 Italian Stability Law: heavy spending cuts and Gghter constraints for local governments
100
101 103
110 113 115 115 114
125
100
95 97
76 69
56
55 51 48
40
50
60
70
80
90
100
110
120
130
2005 2006 2007 2008 2009 2010 2011 2012 2013
Current Exp.
Capital Exp.
Current and capital expenditure. Index 2005=100.
Capital expenditure by urban size
Public investment and urban size U-‐shaped investment curve
0
100
200
300
400
500
600
700
800
900
0-‐5.000 5.000-‐60.000 oltre 60.000
2007
2008
2009
2010
2011
2012
2013 0
100
200
300
400
500
600
700
800
900
2007 2008 2009 2010 2011 2012 2013
Titolo dell'asse
0-‐5.000 5.000-‐60.000 oltre 60.000
New urban spaces; Florence metropolitan area, commu1ng flows
Montespertoli
Barberino Scarperia
S.Piero S. Borgo SL
Vicchio
Vernio
Figline
Reggello Incisa
Rignano
CALENZANO
SESTO CAMPI
SCANDICCI BAGNO a R.
Fiesole Rufina
Pontassieve FI
PO
PT
Impruneta
S.Casciano VP
Greve
EMPOLI
VAIANO
Cantagallo
MONTEMURLO
QUARRATA
Dicomano
Pelago
Tavarnelle
Montelupo
MONTALE
AGLIANA
UNIDIRECTIONAL BIDIRECTIONAL
> 10.000
5.000-10.000
2.000-5.000
1.000-2.000
500-1.000
100-500
Inefficient planning areas
The “real city” has different borders with respect to the exisGng administraGve ones and with respect to the new ones: the new Florence metropolitan area has been defined as perfeclty overlapping the former Florence province area. Defining homogeneous administraGve areas would entail more effecGve infrastructural policies.
(In)Efficiency in Public Procurement
14# 13# 14# 14#
69#75#
66#71#
0"
10"
20"
30"
40"
50"
60"
70"
80"
58%"
60%"
62%"
64%"
66%"
68%"
70%"
72%"
150k+250k# 250k+500k# 500k+1mln# Total#
Incidenza"Delay" Incidenza"Cost"Overrun" Media"Cost"Overrun" Media"Delay"
• 65% of public works show both delays and cost increases • 80% of savings due to aucGon rebates is lost at the end of the execuGon phase
• Inefficient procedures • Low planning skills of small public buyers • Inefficient courts • Limited short-‐run economic effects of public works • Possible pro-‐cyclical effects of investment expenditure • CollecGve demand for public infrastructures is met with significant delay -‐> slow economic recovery
Public works. Delays and Cost overruns by financial dimension. Tuscany, 2013.
(In)Efficiency in the Market of Public Procurement.
Public works, actual and on-‐1me expenditure. Tuscany, 2009-‐2014.
Fase 1 Fase 2 Fase 3
0
20
40
60
80
Milio
ni di
Euro
corre
nti
Feb0
7
Jan0
8
Jan0
9
Jan1
0
Jan1
1Se
p11
Jan1
3
Dec1
3
Jan1
5
Jan1
6
Jan1
7
Jan1
8
Jan1
9
Jan2
0
Mese
Spesa effettiva (certificata)Spesa prevista
(In)Efficiency in the Market of Public Procurement.
Public works by awarding procedure. Tuscany, 2009-‐2014. %.
47%$65%$ 69%$ 72%$ 77%$ 84%$
53%$35%$ 31%$ 28%$ 23%$ 16%$
2009$ 2010$ 2011$ 2012$ 2013$ 2014$
Nego1a1ons$ Auc1ons$
Monitoring of public works. Tuscany’s Regional Law 35/2011
Es1mated survival func1ons for monitored and non monitored public works
0.2
.4.6
.81
Pro
babi
lità
di s
opra
vviv
enza
del
pro
getto
0 500 1000 1500 2000Tempo (giorni trascorsi dall'inizio esecuzione)
Non Monitorati Monitorati
Progetti monitorati
050
010
0015
0020
00F
inan
zam
ento
tota
le (
Mig
liaia
di e
uro)
0 .2 .4 .6 .8 1Quota Regionale (%)
Dis1bu1on of public work projects along the financial dimension (Y) and regional financial contribu1on dimension (X).
• The acGve monitoring result in an overall higher probability of conclusion for public works • For a “standard” project this increase in probability amounts to 43%
Conclusions
-‐ Investment has significantly fallen during the economic crisis -‐ Empirical literature is sGll not conclusive on whether public investment increases producGvity and medium run growth. However, the current economic agenda in Europe is firmly poinGng at investment as a way to kick-‐start growth and sustain it over Gme.
-‐ Mainly due to the exisGng budget constraints, this is intended as a measure aiming at strengthening the economic system’s risk-‐bearing capacity in order to re-‐launch private investment
-‐ Whether or not the Junker Investment Plan will be successful, in Italy, a comparaGvely large part of public investment is undertaken by local governments
-‐ This investment, made by small and medium size projects, is essenGals for maintaining the appropriate level of infrastructural capital stock at the territorial level and are unlikely to be the target of the Junker Plan
-‐ This investment has sharply decreased during the crisis
Conclusions
-‐ The financial constraints deriving from the Internal Stability Pact have played a predominant role in this process, and the lowest level of government have carried a large part of the burden of aggregate naGonal debt recovery
-‐ This trend is likely to be confirmed in the next future -‐ This is not necessarily bad news, since, in principle,
-‐ may discourage the selecGon of low-‐impact projects -‐ may push LGs to find new financial sources in the private market, thereby also
improving efficiency in the construcGon and management of the new infrastructures
-‐ may foster horizontal insGtuGonal cooperaGon
-‐ Apart from financial constraints, structural inefficiencies have played a significant role: -‐ a fragmented insGtuGonal framework accompanied by fuzzy and to-‐date largely
uneffecGve insGtuGonal reforms have reduced the LGs ability to plan and implement cross-‐boundary infrastructures
-‐ An ineffecient public procurement market (also favouring inefficient (and relaGvely small) firms)