The territorial impact of COVID-19: Managing the crisis and recovery across levels of government

Territorial dimension of health responses

• Many countries moved from an approach that was applied nationally when the crisis hit in spring 2020, to a more territorial and differentiated approach across regions. In this way they adapt the crisis responses to local needs and limit the costs of national lockdowns. In many countries, specific measures regarding masks, school and restaurant closures, and full lockdowns have been adopted for specific localities or regions to limit their economic impact, e.g. in Australia, Canada, Colombia, Finland, France, Germany, Italy, Spain and the UK. While such a differentiated territorial approach is natural in federal countries, where health responsibilities are largely decentralised, it is also increasingly seen in a number of unitary countries. Since mid-2020, regional and local governments have also been more actively adjusting their response measures to the local context.

• Beginning in December 2020, vaccination campaigns are being rolled out and implemented, with significant territorial and multi-level governance dimensions. For the most part, vaccination campaigns are led by national governments. Their implementation, however, is generally in coordination with subnational governments and health agencies to better address local needs and demographic differences (i.e. the share of the regional population falling into vaccination-priority groups). Challenges can arise when subnational governments were not sufficiently involved in design of the vaccination delivery strategy. Some countries are currently exploring adopting a territorial approach to vaccination campaigns focused on communities or regions with higher risk level or a higher incidence of COVID-19 cases.

• During the first quarter of 2021, significant challenges hindered vaccine deployment. Important challenges include limited vaccine supplies in some advanced economies and most developing countries due to constrained production capacity, and a highly inequitable and inefficient distribution of existing supply between countries. Varying capacity to plan and execute mass vaccination campaigns, in particular a lack of coordination across levels of governments and the effect of emerging viral variants of concern (VOCs) on the effectiveness of existing vaccines are also issues during the early phase of vaccination campaigns.

• Within countries, regional disparities in accessing vaccines are generally limited, which indicates that there is an effort to make access universal across regions but also shows that regions with the highest incidence have not been prioritised. In countries where regional disparities are significant, they are often driven by factors relating to health or demographic factors and therefore differing shares of prioritised populations. Vaccine uptake rates may also differ across regions due to differences in local preferences or vaccine acceptance.

Economic responses

• Governments have provided massive fiscal support to protect firms, households and vulnerable populations. Global fiscal support amounts to USD 13.8 trillion, with USD 7.8 trillion in additional spending and forgone revenue and USD 6 trillion in equity injection, loans and guarantees since March 2020. This is much more than what was provided during the 2008 global financial crisis. Many countries, and the EU, are directing new financing and reallocated public funding to crisis priorities, supporting health care, SMEs, vulnerable populations and regions particularly hit by the crisis. With social protection as a key responsibility, subnational governments are pivotal in supporting vulnerable populations, which are at high health and economic risk. Subnational governments also play an important – and growing – role in supporting SMEs and the self-employed. For example, in the EU 30% of surveyed subnational governments provided large direct support to businesses and the self-employed in 2020.

• While immediate fiscal responses concentrate on protecting workers, the unemployed and vulnerable populations, in the second half of 2020 many governments also announced large recovery packages focusing on public investment. These investment recovery packages target priority areas, which include the transition to a carbon neutral economy; digitalisation; the strengthening health systems; and social infrastructure. Given the territorial differentiation of COVID-19’s impact, and the level of public investment in the hands of subnational governments (57%) it is crucial that recovery strategies have an explicit territorial dimension and involve all levels of subnational government early in their implementation. While this is the case in some countries, it remains a challenge for many.

• The COVID-19 crisis has accelerated awareness of the urgent need to shift to a carbon neutral economy at all levels of government. Post-crisis recovery strategies are a unique opportunity for governments to allocate recovery funds to sustainable initiatives and take measures to reduce the carbon-intensity of economic activities. However, there are often significant gaps between intentions and the concrete policy measures that are adopted. At the national level, an analysis of OECD and OECD key partner countries’ recovery packages found that the USD 340 billion in green recovery measures announced so far is still an order of magnitude smaller than the overall amounts devoted to recovery measures: the spending allocated to green measures represents about 17% of recovery spending or 2% of total COVID-19-related spending in OECD countries, Costa Rica (accession) and Brazil, China, India, Indonesia and South Africa (OECD, 2021[3]). At the subnational level, a survey of local governments in the EU found that although more than two-thirds of the 300 regional and municipal respondents stated that the transition to a low-carbon economy should shape long-term regional development policy to a large extent, less than half were considering using recovery strategies to achieve green objectives.

• Different instruments have been activated to maintain or accelerate public investment projects at the subnational level, e.g. improving self-financing capacity, relaxing budget rules, increasing capital transfers and subsidies, easing the access to long-term projects on bank credit and capital markets and supporting projects preparation and implementation. Other financing mechanisms may be activated such as public-private partnerships schemes or equity financing.

Subnational finance

• In 2020, almost all OECD countries introduced measures to support subnational finance. The measures included revenue-side measures, expenditure-side measures, financial management measures and measures related to fiscal and debt rules, including to facilitate the use of debt for short and long term needs. Revenue-side measures and measures related to fiscal rules and debt seem to be the most frequently applied. Prospects for 2021-2022 are highly uncertain. Some countries have announced the continuation of support packages in 2021. Yet, they could also be reduced, as well as targeted to the subnational governments most affected by the crisis (e.g. Austria, Chile, Costa Rica, France, Italy, Korea, Norway, Slovenia, Sweden). Crisis and recovery plans are also offering an opportunity to launch or accelerate local finance reforms in some countries (e.g. France, Iceland, Spain, UK).

Most regions were underprepared

Most countries, regions and cities were not well prepared for the pandemic for several reasons: i) they underestimated the risk when the outbreak emerged; ii) many did not have crisis management plans for pandemics; iii) they lacked basic personal protective equipment (PPE), such as masks; and iv) in some countries, the ability of the health care system to respond to the coronavirus crisis was weakened by several years of moderating, or decreasing public expenditure, and investment in health care/hospitals in the aftermaths of the global financial crisis. For example, between 2008 and 2018, the number of hospital beds per capita decreased in almost all OECD countries, declining by 0.7% per year, on average (OECD, 2020[48]).

Moreover, in some countries, regional disparities in access to health care can be significant as measured by the number of hospital beds and active physicians per 1 000 inhabitants (Figure 5). For example, in the United States, North Dakota has above 5 hospital beds per 1 000 inhabitants, whereas New Mexico has less than 2. In addition, disparities appear to be independent of whether health care spending is decentralised (see Box 1).

 

Figure 5. Large regional disparities in access to health services

Hospital beds and active physicians per 1 000 inhabitants, 2018

Note: Large regions, TL2

Source: (OECD, 2020[48])

Subnational governments at the frontline of crisis management

Since the outbreak of the pandemic in early 2020, regional and local governments have been at the forefront of managing the COVID-19 health crisis and its social and economic consequences, reflecting the significant responsibilities they have in a number of areas, including those particularly impacted by the COVID-19 crisis. In many countries, for example, subnational governments are responsible for critical aspects of health care, from primary care to secondary care, including hospital management, accounting for 25% of total public health expenditure, on average (Figure 6). Subnational governments have been active in tracking, testing and isolating patients and are now implementing national vaccination strategies at the local level.

 

Figure 6. The share of subnational government in public expenditure by sector in OECD countries

Note: The OECD average (unweighted) is calculated for 33 countries (no data for Canada, Chile, and Mexico) with data from 2017. The functional areas correspond the Classification of the Functions of Government (COFOG), which distinguishes 10 areas. The total of general government spending is non-consolidated.

Source: (OECD, 2018[52])

Subnational governments are responsible for nearly half of all education spending and have played active roles in managing the closing and safe re-opening of schools under very strict health measures. They are also often responsible for welfare services and social transfers

It is important to note too, the significant role that subnational governments play in essential public services, such as water distribution and sanitation, waste collection and treatment, street cleaning and hygiene, public transport, public order and safety, and basic administrative services, whose proper delivery is fundamental in managing the pandemic. In some countries, state, regions and municipalities are also responsible for emergency services and police, who have been called upon during confinement periods to ensure control, security and rescue.

Regional and local governments are responding by maintaining essential services, if not at full service-levels then at adjusted ones, and by developing or providing better access to tele-services (tele-health consultations, tele-education). Finally, the emergency situation has led many subnational governments to take initiatives in areas outside the scope of their normal responsibilities, either upon request by the central government or in response to emergencies.

Mitigating the impact of confinement and facilitating social distancing: the impact of telework

The extent to which occupations can be performed remotely is an important mitigating factor with respect to economic impact and cost of COVID-19 containment measures, and the evidence confirms strong regional differences. Urban areas (41.6%) for example have an 11 percentage point higher share of occupations that can be performed remotely than rural areas (30.5%) (OECD, 2020[54]).

In most cases large cities and capital regions offer highest potential for remote working within countries (Figure 9). Such a capacity might contribute to a territorial differentiation in resilience. On average, there is a 15 percentage point difference between the region with the highest and lowest potential for remote working in a given country, and more than 20 percentage points in the Czech Republic, France, Hungary, and the U.S. It is important to note that these findings assume that all workers – regardless of location – have access to an efficient internet connection and to the necessary equipment. Nevertheless, there are often significant disparities in capacities across regions in the OECD, with rural areas often demonstrating lower access to high-speed broadband connections and digital take-up, so actual gaps may even be larger: 1 in 3 households in rural areas do not have access to high-speed broadband on average in 26 OECD countries (OECD, 2020[48]).

 

Figure 9. The possibility to work remotely differs among and within countries

Share of jobs that can potentially be performed remotely (%), 2018, NUTS-1 or NUTS-2 (TL2) regions

Note: The number of jobs in each country or region that have the potential to be carried out remotely as the percentage of total jobs. Countries are ranked in descending order by the share of jobs in total employment that can be done remotely at the national level. Regions correspond to NUTS-1 or NUTS-2 regions depending on data availability. Outside European countries, regions correspond to Territorial Level 2 regions (TL2), according to the OECD Territorial Grid.

Source: (OECD, 2020[54])

The fiscal impacts on subnational governments are asymmetric

From the onset of the crisis in 2020, it quickly became apparent that the impact on subnational finances would be significant, given the exposure of subnational government to the effects of the crisis and their commitment to addressing it.

A June-July 2020, a survey jointly conducted by the OECD and the European Committee of the Regions (CoR) with 300 representatives of regional and local governments in 24 countries of the European Union (CoR-OECD, 2020[55])indicated that in the short and medium terms 85% of surveyed subnational governments expected the COVID-19 crisis to have a highly or moderately negative impact on their finances, with a dangerous "scissors effect" of rising expenditure and falling revenues. Beyond the European Union, other surveys reported similar impacts. For example, the US National League reported a severe and long-lasting impact on US cities with a loss of own-source revenue reaching 21.6% in 2020 (US National League of Cities,, 2020[56]).

Data covering the whole of 2020 confirm this negative impact, albeit at a lower level than some of the earlier surveys first indicated, in part because of significant central/federal government measures to support local finances (e.g. through emergency and compensation grants or the coverage by the central/federal government of certain types of expenditure) and through savings in expenditures and deferrals or cancellations of investment projects.

However, while the impacts have been less than first feared, there remains considerable uncertainty over the longer term for a number of reasons.

First, because of uncertainties around the sanitary situation. While vaccine rollouts are starting to have positive effects towards containing the pandemic (but also costs to subnational budgets), it remains uncertain how quickly they can be rolled out and how often they will need to be administered (over the longer-term, e.g. boosters or in response to new strains).

Second because many deferred essential expenditures in 2020 (including on investment) cannot be deferred indefinitely, and moreover, because, in many countries, tax revenues in 2020 reflected activities in 2019 not 2020.

Third, because the impact on subnational finance in 2021 and 2022 will depend a lot on the continuation and extent of support that will be provided by higher levels of governments. Withdrawing support too quickly (but with costs related to the crisis, including declines in revenues, still be to incurred) and introducing tight fiscal consolidation measures to address higher borrowing in 2020 will have a significant impact on sub-national finances, subnational public investment, and indeed delivery of essential services, which would have an impact on longer-term growth as was the case after the 2008 financial crisis when public investment was cut heavily in many OECD countries.

Moreover, the impacts both in 2020 and going forward are asymmetric within countries, reflecting five main factors (Box 2), in addition to factors such as geographic location and socio-economic patterns.

 

Box 2. Differentiated impact on subnational government finance

The impact of COVID-19 on subnational finance is differentiated among countries, among levels of government, among regions and among municipalities. The varying effects on subnational finance depend on five main factors, all of which need to be taken into account to analyse and compare the fiscal impact of COVID-19 on regions and municipalities:

1. 1.

   Importance and type of spending responsibilities: the role of regions and cities in managing the crisis can vary depending on the degree of spending decentralisation and the scope of subnational government responsibilities (e.g. health, social protection, economic development, etc.);

2. 2.

   The characteristics of subnational government revenues, in particular their degree of sensitivity to economic fluctuations (e.g. drop in tax revenues based on activity, income and consumption, decrease in user charges and fees) and policy decisions (e.g. exemptions, abrogation, postponement).

3. 3.

   Flexibility of fiscal frameworks: the impact will depend on the ability of subnational governments to absorb exceptional stress, their capacity to adjust their expenditure and revenues to urgent needs and to access external financing;

4. 4.

   Fiscal health or pre-pandemic financial conditions: the impact will depend on budget balance and debt situation of a given local government before the crisis as well as the level of cash treasury and set-aside reserves;

5. 5.

   Scope and efficiency of government support: the impact on finance also depends a lot on the scope and efficiency of support policies from higher levels of government and the existence of equalisation/solidary mechanisms.

 

Figure 10. Five main differentiating factors

Source: Authors’ elaboration

The impacts differ according to the country, the different levels of subnational governments (e.g. regions or cities) as well as between subnational governments of the same level.

Between countries, the effects largely differ according to the degree of decentralisation. Perhaps not surprisingly, in countries where the level of decentralisation is high, the impact on subnational government expenditure will also be higher, reflecting in large part devolved responsibilities for spending in areas most affected by the crisis (i.e. health, social protection, education, utility services, economic development, etc.). This is also true for revenue, as confirmed in the OECD-CoR survey (OECD-CoR, 2020[57]). The extent of the impact also differs according to the underlying fiscal strength of the subnational public sector before the crisis. In a number of countries, the fiscal situation of subnational governments was relatively good before the COVID-19 crisis (e.g. the Czech Republic, Denmark, and Switzerland) and so they had higher capacities to absorb the fiscal impacts (S&P Global Ratings, 2020[58]).

Between levels of governments, the impact depend on their respective spending responsibilities and revenue structure. The regional level may be more affected than the local level, and vice-versa. For example, in many countries it is estimated that municipalities will feel the financial shock mostly in 2020, as the loss of revenue mainly comes from the decrease in tariffs and user charges and/or local taxes, but it may be temporary (tourist tax) or delayed (deferrals). Municipalities could be spared in the future compared to regions, whose revenues depend more on taxes sensitive to economic activity, consumption or personal income. The fiscal shock on many regions could be delayed to 2021, and even 2022.

The impact can be also differentiated within the same subnational government level. There are different parameters that have implications for the nature of subnational expenditure and revenues, and then on the degree of fiscal exposure to the crisis. Subnational governments will be more or less vulnerable to the crisis depending on the geographic localisation (e.g. located in an area particularly hit by the health or socio-economic crisis), the population size (large cities versus rural municipalities), the socio-demographic characteristics (e.g. importance of elderly or vulnerable groups, etc.), the economic profile (tourism, manufacturing, mining, etc.) and the resilience of their local economies. For example, touristic regions and municipalities - coastal regions and ski resorts in Austria, France, Italy, and Switzerland, as well as urban tourist destinations - are particularly affected by domestic and international travel restrictions, reduction in tourist attendance the closure of hotels, exhibition and congress centres, tourist sites (museums, natural parks, leisure establishments, etc.), restaurants and cafes, festivals and other cultural facilities. Port cities are particularly hit by the crisis, not only because of declining cruise activities, but also because of the strong slowdown in port activities as a whole (maritime transport, fishery, shipyards, etc.), despite the fact they kept terminals open to boats and ensured a minimum level of continuous activity.

The state of the local government fiscal health prior to the crisis also play a role on the differentiated degree of resilience to the crisis. Some subnational governments may have a low level of indebtedness and important cash reserve. In the US, the level of preparedness for a recession is mixed, with certain states possibly lacking sufficient reserves to absorb the fiscal stress beyond the immediate short term. Some states are most exposed to pressure derived from exogenous shocks given their comparatively weaker credit metrics, including lower reserve levels, cyclical revenue streams, and elevated fixed costs e.g. pensions, debt service, other postemployment benefits (Standard&Poors, 2020[59]).

The impact on revenues, expenditures, debt and assets are also asymmetric

The COVID-19 crisis and the associated policy responses have had a strong negative effect on subnational government finances (Figure 11) which has differed across regions. The crisis is reported to have a somewhat larger impact on revenue than on expenditure. 

 

Figure 11. Impact of the COVID-19 crisis on subnational finance in the European Union

Answers from subnational government officials to the question: How negative do you expect the impact of COVID-19 to be on your revenue, expenditure, debt management and access to borrowing?

Note: Subnational governments submitted their answer to the survey in June-July 2020

Source: (OECD-CoR, 2020[57])

The impact on subnational government revenues

The COVID-19 crisis has generated a significant fall in subnational government revenue: tax revenue, user charges and fees and income from physical and financial assets. Not surprisingly, the impact on subnational governance finance, is likely to depend on the mix of these revenue sources (Figure 12). In countries where subnational governments are largely funded by central governments transfers (e.g. Estonia, Lithuania, Mexico, the Slovak Republic), the negative impact may be smaller1. However, in some countries, especially federal countries where most of transfers to local governments come from the state governments, there is some concern about the ability of states to sustain their transfers, such as in the United States (Chernick, Copeland and Reschovsky, 2020[60]).

 

Figure 12. Sources of subnational government revenues vary across countries

Breakdown of subnational government revenues by category (% of total revenue, 2018)

Note: 1. Australia and Chile: estimates from IMF Government Finance Statistics; 2. 2017 data

Source: (OECD, 2020[61])

In the European Union, according to surveyed subnational governments, tax revenue is anticipated to be the most affected revenue source, followed by user charges and fees. Grants and subsidies, as well as revenue from assets are expected to decrease to a lesser extent, but probably in the medium and longer term (OECD-CoR, 2020[57]) (Figure 13).

 

Figure 13. Impact on subnational revenue, by revenue source

Note: Subnational governments submitted their answer to the survey in June-July 2020

Source: (OECD-CoR, 2020[57])

The impact on subnational government expenditure

This crisis is calling on regions and cities to increase their expenditure in many areas, with the impact, of course, being more severe in those subnational governments with responsibility for critical aspects of health care systems, including emergency services and hospitals. In 2018, health expenditure accounted for 18% (weighted average) of subnational expenditure in the OECD. Additionally, subnational governments have expenditure responsibilities in social protection, which is particularly affected by the COVID-19 crisis, including social assistance and social benefits (14% of subnational expenditure). Beyond health and social responsibilities, subnational governments are involved in key areas impacted by the crisis, including education (the first spending item at 24%), public administration (15%), economic development and transport (13%), public order and safety (7%), utilities (waste, water, etc.), etc. In the context of the crisis, subnational governments are confronted with a number of complex and costly tasks. They had to manage the full or partial closure of certain services and facilities and then their reopening while having to ensure the continuity of essential public services, adapt services either physically (public transport, collection of waste, cleaning of public spaces) or virtually (tele-health consultations, remote education arrangement, local tax payments, access to government information, etc.) and enable officials and employees to work remotely. Finally, in many countries, subnational governments are involved in delivering support policies for SMEs and the self-employed, as well as infrastructure investment.

Although some expenditure items have been temporarily reduced (e.g. cancellation of events, decrease in intermediate consumption, for example petrol) or deferred in time (e.g. investments), most subnational spending items have increased in the short term (emergency expenditure), and also in the medium-term in response to exit strategies and recovery programmes.

According to the OCDE-CoR survey, over half of subnational governments anticipate significant expenditure increases in social services and benefits, support to SMEs and the self-employed, and public health (Figure 14). More moderate expenditure increases are expected in education, information and communication technologies, adapting local public transport, adapting administrative services and public order and safety. Regions in the EU are more likely than municipalities to experience increased spending on health services, support to SMEs and the self-employed, and adaptation of public transport, in large part reflecting their broader responsibilities in these areas (OECD-CoR, 2020[57]).

 

Figure 14. COVID-19 pressure on subnational expenditure, by service area

In the following service areas, how much pressure do you expect the COVID-19 crisis to put on your subnational entity's expenditure?

Note: Subnational governments submitted their answer to the survey in June-July 2020

Source: (OECD-CoR, 2020[57])

The impact on subnational government budget balance and debt

The effects on sub-national finances of course extends beyond the immediate impact on expenditures and revenues and their direct impact on assets and liabilities, there are also indirect impacts on the values of assets that may hamper the ability to borrow. Local public companies are also exposed to the COVID-19 crisis. Some categories suffered from the cessation or slowdown of activity, particularly in the tourism, culture, leisure and transport sectors. Business failures and threats to capitalisation and equity affect subnational governments as shareholders (FEPL, 2020[66]).

Preliminary data on 2020 fiscal accounts show that the impact on budget balances was lower than expected. In some cases, budgetary positions have improved, thanks to the support from central/federal government (which have decided to absorb most of the fiscal shock on the national economy and which in turn saw their budget balances significantly deteriorate in 2020). In 2021, a significant deterioration of subnational budget balance is expected in many countries. Subnational government expenditure may continue to increase in many countries (expenditure related to the recovery, social protection and health) while the support of central/federal, or state government will probably diminish, reducing its stabilising role.

In 2020, subnational government debt - short and long-term - has increased in many countries, also favoured by good financing conditions, in particular low interest rates (see Annex 2). Short-term borrowing has been used to bridge delays in revenue and cover a lack of liquidity in 2020. Many national governments facilitated subnational government access to short-term borrowing and credit lines, including specific COVID-19 credit lines (Colombia, France). By June 2020, 15% of surveyed subnational governments in the EU had increased borrowing to cope with the crisis and 24% were planning to increase borrowing (Figure 15). Short-term and emergency loans represented more than half of new subnational government borrowing in the European Union in June 2020.

According to recent estimates, long-term borrowing has increased in 2020 and will continue to increase in 2021 as a result of subnational government activity recovery programmes and public investment stimulus plans, relaxed regulatory constraints on subnational long-term borrowing and eased access to long-term borrowing, notably on capital markets (S&P Global Ratings, 2021[67]).

Going forward, subnational government borrowing will depend on the depth and longevity of the crisis, the availability and amount of support from the central/federal government, and the appetite of subnational governments to continue a counter-cyclical fiscal policy to support the recovery. It will also depend on the fiscal capacity of subnational government to access new borrowing. Many regions and municipalities are already, and will probably be, weakened by lower fiscal performance and creditworthiness. In some cases, the capacity to borrow is limited by the current level of indebtedness of subnational governments.

 

Figure 15. New borrowing to cope with the COVID-19 crisis

Has your subnational entity increased its borrowing to cope with the COVID-19 crisis?

Note: Subnational governments submitted their answer to the survey in June-July 2020

Source: (OECD-CoR, 2020[57])

Subnational government borrowing could then reach new record at global level. Global borrowing could hit USD 2.25 trillion in 2021, including 40% for China, 20% for the United States, 8% for Germany, 6% for India and 5% for both Japan and Canada. Global bond issuance could average USD 1.9 trillion in 2020‑2022, and cover around 84% of regional and local governments. Around half of this will be placed in emerging markets - China, India, Argentina, Russia, Brazil, and Mexico mainly - with the rest issued in developed markets (S&P Global Ratings, 2021[67]). Increased borrowing will push global subnational government outstanding debt to USD 14.6 trillion by the end of 2021 and USD 15.4 trillion by the end of 2022. The debt stock remains quite concentrated. The United States and China account each for 29% of the global outstanding debt, followed by Japan (10%), Canada and Germany (6% each) and India (5%).

In developed economies5, subnational government gross borrowing has increased and reached a new peak of USD 1.1 trillion in 2020, roughly 20% higher than the average for 2015-2019 and should remain at this level in 2021 to large extent because of widening deficits and countercyclical fiscal policy measures taken to support local economies (S&P Global Ratings, 2021[68]). In most countries, gross borrowing has exceeded pre-crisis projections in 2020 (Annexe 2). Australia, Canada, , France, Italy and Japan should experience a high increase of gross borrowing in 2021 while in the United States, the massive forthcoming stimulus from the federal government will likely result in the tapering of state and local governments borrowing. Bond issuance has represented about 75% of gross borrowings in 2020 (S&P Global Ratings, 2021[68]). Overall, local and regional governments outstanding debt in developed markets would amount to around USD 9.2 trillion by end-2021 and USD 9.4 trillion by end-2022 as net borrowing will remain above zero (Figure 16), the United States accounting for 47%, followed by Japan (15%), Germany (10%), Canada (9%) and Spain (4%) (S&P Global Ratings, 2021[68]).

 

Figure 16. Subnational debt stock to soar as net borrowing increases

Subnational debt outstanding in 2020 and 2021, USD billion

Source: Own calculations based on (S&P Global Ratings, 2021[67])

Testing and tracing

Testing has been an essential component of exit strategies from containment. Since the pandemic’s early stages, the WHO recommends massive testing to fight the coronavirus (WHO, 2020[114]). Frequent virus testing helps identify and isolate people who are infectious before the symptoms develop and prevent the risk of second waves. To reduce the risk of new waves of COVID-19 outbreaks, the OECD highlighted in 2020 that 70%-90% of all people who have been in contact with an infected person need to be traced, tested and isolated if infected (OECD, 2020[115]). This requires a massive increase in testing and can be costly. Yet, the challenges and costs associated with doing so pale in comparison to the costs lockdowns. (OECD, 2020[115]).

Testing and contact tracing was for example at the core of Korea’s successful strategy to manage the first wave of infections with local governments responsible for COVID-19 screening stations allowing for quick and safe testing and monitoring of those in self-quarantine. European countries considerably increased their capacities and generalised testing for suspicious cases between May and November 2020. The use of auto-test has also been generalised.

In decentralised countries, while central governments need to ensure financial resources and coordination, the actual policy delivery is the responsibility of regional and local governments. Even in countries with more centralised health service delivery, local and regional governments contribute to organising testing and isolation measures, which leaves room for local initiatives and experimentation. It contributes to managing the pandemic’s asymmetric impact, which often requires quick local-level reactivity to identify and control clusters.

Social distancing

Social distancing has been at the core of crisis management since the early phase of the pandemic and is likely to durably affect behaviour and policies. National health authorities and the WHO set out detailed recommendations to limit contagion. Among these are the need to ensure minimum distances between people. Advice on physical distancing affects public transport, schools, and urban mobility. One of the biggest challenges for local governments has been to organise the return to school under the best possible conditions, respecting social distancing rules amid soaring cases. The use of protective equipment to prevent the transmission of the virus has considerably increased. Many subnational and national governments are recommending the use of masks in public transport, shops, and other commercial or public spaces.

The timing of restriction measures matters at least as much as their duration. During the first outbreak in March 2020, European countries that acted early by enforcing containment and mitigation strategies before the virus spread within communities limited COVID-19 fatalities (OECD/European Union, 2020[116]). Large-gathering adjustments (WHO, 2020[117]) and mandatory face mask covering (WHO, 2020[118]) need to be in place where the level of transmissions increase and place additional strain on the healthcare system. This requires accurate data and efficient testing strategies at the local level. To limit the spread of the virus and restore economic activity, the WHO recommends radically increasing testing as a means to better target social distancing.

Local and national lockdowns

In the early phase of the crisis, regional mobility patterns were broadly uniform but once restriction measures became regionalised, during the first exit phase, regional mobility patterns started to diverge within countries (Austria, Germany, Italy) (Figure 17). Effective coordination between local authorities, health agencies and the central government are essential to manage local outbreaks.

 

Figure 17. Change in mobility in Europe, TL3 regions

Change in mobility between 28 February and 3 April (left) and between 28 February and 29 May (right)

Source: (Santamaria et al., 2020[119])

Managing the vaccination campaigns across levels of government

Vaccinating the global population against COVID-19 is the only long-term strategy to safely contain the coronavirus crisis. Vaccination campaigns began in some countries in December 2020. The WHO, despite the availability of efficient vaccines in several countries, does not know whether global herd immunity to COVID-19 can be achieved, and in any case does not expect so in 2021 (AP, 2021[134]), especially given that vaccines deployment takes time due to both upstream and downstream supply chain bottlenecks and the geographical concentration of production (OECD, 2021[135]). In particular, significant challenges were hindering vaccines deployment during early 2021, such as limited supplies of vaccines in some advanced economies and most developing countries due to constrained production capacity and a highly inequitable and inefficient distribution of existing supply between countries. Varying capacity to plan and execute mass vaccination campaigns, in particular a lack of coordination across levels of governments and the effect of emerging viral variants of concern (VOCs) on the effectiveness of existing vaccines were also issues during the early phase of vaccination campaigns. Nevertheless, governments must anticipate the surge in supply and get the logistics and infrastructure ready: by the third quarter of 2021, the United States and EU Member States will likely have received more than one full regimen per person (OECD, 2021[136]). They also need to address distrust and scepticism regarding vaccine safety and efficacy to ensure that populations are willing to be vaccinated.

As of 10 May 2021, 12% of the OECD population had been partially vaccinated and 15.8% fully vaccinated (Figure 18). Vaccination rates markedly differ across countries and it will be at least the end of 2023 before enough doses are manufactured to vaccinate the entire global population (CGD, 2020[137]). High-income countries have purchased 4.6 billion doses. The COVAX facility, which unites 92 low- and middle-income economies, expects the global supply of vaccines to reach 1.8 billion doses in 2021, covering 27% of their population (GAVI, 2021[138]).

 

Figure 18. Vaccination rates, by country according to the number of doses administered

OECD countries and selected developing economies, 10 May 2021

Note: “Fully vaccinated” refers to the proportion of the population that has received two doses, “Partially vaccinated” refers to the proportion of the population that has received only one dose. Data include all OECD countries and Costa Rica. Non-OECD countries include: Argentina, Brazil, Bulgaria, China, Croatia, Cyprus, India, Indonesia, Malta, Romania and the Russian Federation.

Source: Own calculations based on Oxford University - OWID database

The management of the vaccination rollout has significant territorial and multi-level governance dimensions. Vaccination strategies and the allocation of tasks across levels of government differ between countries (Box 4 and country examples). In the European Union, member states have taken a centralised EU approach to securing supplies and providing support for the development of vaccines under the EU vaccines strategy (European Commission, 2020[139]). The vaccination campaign strategy is decided at the national level and implemented across levels of government. In the United States and United Kingdom, states and devolved nations have some autonomy to decide how they allocate doses across populations. Within countries, ensuring safe and fair access to vaccines across places requires effective coordination mechanisms between national and subnational governments, whose responsibilities differ but must work hand in hand to allow for a smooth deployment of vaccines, for example by sharing doses delivery projections.

Regional disparities within countries in accessing COVID-19 vaccines are generally small (Figure 19), which indicates that there is an effort to make access universal across regions but also shows that regions with the highest mortality have not been prioritised. In countries where disparities across regions are significant, they are often driven by social, health and demographic factors, such as the age of the population in a region, resulting in differing shares of prioritised populations. Uptake rates may also be different: in some countries, a lower percentage of the population get vaccinated in disadvantaged neighbourhoods. In England and France, regions with a higher share of elderly populations had higher vaccination rates early in the campaign (NHS, 2021[140]) (Geodes, 2021[141]). In the United States, the federal government allocates vaccine doses to states on the basis of their adult population, while priority groups are defined at the state level (CDC, 2021[142]). In Israel, territorial disparities in vaccines take-up rates are driven by demographics and socioeconomic differences between municipalities (Box 4). Some countries are currently exploring adopting a territorial approach to vaccination campaigns focused on communities or regions with higher risk level or a higher incidence of COVID-19 cases: certain regions under significant pressure have received additional doses, for example in Brazil (CNN Brazil, 2021[143]), France (France Bleu, 2021[144]) or Norway.

 

Figure 19. Regional disparities in COVID-19 vaccinations, TL2 regions

Number of COVID-19 vaccinations per 100 inhabitants, 10 May 2021

Note: COVID-19 vaccinations per 100 inhabitants refer to the number of doses administered as a share of TL2 population. In Israel, data is provided at the municipality level. In the United Kingdom, data is provided for devolved nations.

Source: (Argentina Ministry of Health, 2021[145]), (Turkey Ministry of Health, 2021[146]), (RKI, 2021[147]), (CDC, 2021[142]), (FHI, 2021[148]), (India COVID-19 vaccine GitHub, 2021[149]), (Spain COVID-19 vaccine GitHub, 2021[150]), (Belgium COVID-19 vaccine platform, 2021[151]), (Czechia Ministry of Health, 2021[152]), (CCODWG, 2021[153]), (Danish Serum Institute, 2021[154]), (Geodes, 2021[141]), (Italy Council of Ministers, 2021[155]), (Austria Ministry of Health, 2021[156]), (Brazil Ministry of Health, 2021[157]), (UK Government Covid-19 Platform, 2020[33]), (PHA, 2021[158])

 

Box 4. COVID-19 vaccination campaign in Israel

Israel is the only OECD country in which more than 60% of the population had been fully vaccinated by mid-March 2021 and is already seeing the effects of vaccination on population health (OECD, 2021[136]). The vaccination campaign started with a focus on the adult population of over 60 years of age, people at risk due to a pre-existing medical condition, and frontline healthcare workers and subsequently was gradually extended to the general population (Israel Government, 2020[159]). The Ministry of Health has set the target of 4 million inhabitants (44% of the population) vaccinated with 2 doses, 95% of whom would be aged 50 years or over, before starting to fully reopen the economy.

Since the beginning of the vaccination campaign, hospitalisations due to COVID-19 among the elderly have decreased faster than in other age groups, suggesting that vaccines are effective at curbing infections and preventing severe conditions (Weizmann Institute of Science, 2021[160]): between 15 January 2021 and 8 February 2021, 51% fewer cases and 29% fewer critically ill patients were reported among the 60 years and over while 19% fewer cases but 31% more critically ill patients were reported among the rest of the population.

Vaccination rates are not uniform across places and disparities between municipalities are explained by several socioeconomic factors (Figure 20): the proportion of the elderly (over 75 years old), and the share of active population (income earners) in the municipal population are clear drivers of vaccines uptake.

 

Figure 20. Territorial disparities in COVID-19 vaccination in Israel

As of 25 March 2021

Note: Dot size is proportional to municipal population (in logs) and colour is determined by the share of active population (income earners).

Source: Own elaboration based on data from data.gov.il, Arcgis Israel Coronavirus Response, Israeli Central Bureau of Statistics

These disparities reflect both the national vaccination strategy, namely that the elderly have so far been prioritised, but also that uptake varies across communities. Drawing on citizen trust by providing leadership and evidence-based impact analysis is essential. The Ministry of Health conducted targeted public information campaigns in several languages (Hebrew, Arabic, Russian and Amharic) on the efficacy of vaccines (Global Government Forum, 2021[161]).

Israel vaccination campaign is centralised but leverages community-based health maintenance organisations (HMOs) IT and logistical and organisational capacity to reach peripheral regions, villages and towns. As they operate under logistical constraints, good coordination between the Ministry of Health and local authorities is essential. Vaccination vans and 150 vaccination complexes have been set up to allow vaccinating the population unable to reach vaccination centres (Israel Ministry of Health, 2020[162]). Local officials, communities leaders and HMOs, whom citizens tend to trust more than the central government, have also helped to get populations to accept vaccination (Israel Journal of Health Policy Research, 2021[163]).

Support to SMEs and the self-employed at regional and local levels

Across the OECD, small and medium-sized enterprises (SMEs) account for 99% of all businesses and between 50% and 60% of value added. SMEs are particularly vulnerable during the crisis (OECD, 2020[6]). In addition to SMEs, the self-employed represent a considerable share of total employment in a number of OECD countries. Amounting to slightly less than 15% on average, self-employment is particularly prevalent in Greece, Italy, and Turkey where it exceeds 20% (OECD, 2020[6]). The self-employed are often less protected by unemployment benefits compared with standard workers.

The restrictions put in place to tackle the epidemic directly and indirectly affect local businesses and the self-employed. Some businesses, such as restaurants and cafes, closed during lockdowns, while other small and medium sized businesses and self-employed were able to continue operating but with considerably reduced demand. Some furloughed or dismissed their personnel. In many countries, local businesses were able to restart in large scale in June 2020, however new lockdowns across Europe, and targeted lockdowns elsewhere, hampered the recovery, particularly in the service sector.

To help avoid running into liquidity bottlenecks and bankruptcies among local business and self-employed workers, most national governments have taken strong actions to support SMEs and micro-businesses, self-employed, artisans, liberal professions, retailers. This is especially the case in highly affected regions, for example those where there is a predominance of SMEs, such as in Northern Italy (OECD Trento Centre for Local development, 2020[188]) or whose economies depend significantly on tourism, culture, leisure and recreation, transport, construction, wholesale and retail trade, accommodation and food services, real estate, professional services, and other personal services (e.g. hairdressing) (OECD, 2021[2]).

Many subnational governments also took early action to support their local economies by supporting SMEs, artisans, retailers and self-employed affected by the crisis. Emergency measures taken by regional and local government cover a wide range of areas, from financial support to more indirect support schemes, including:

• Financial support: non-repayable grants, concessional loans at low or zero interest rates, liquidity loans, facilitating access to external financing through guarantees, deferring loan instalments,

• Dedicated measures to support start-ups (which are often the most affected (bridge financing, guarantees, loans, tax measures, liquidity support, direct equity investment, capital risk funds, etc.)

• Fiscal support: deferring tax and fees collection, granting exemptions and tax reliefs

• Administrative support: introducing more flexibility in administrative procedures, relaxing certain restrictions easing regulations and permits required from businesses,

• Public procurement: simplification and acceleration of procedures

• Temporarily lowering rents (deferment or reduction of rent payments for tenants when premises belongs to subnational governments) and advancing payments to service providers

• Technical assistance and support services to local economic actors: free or reduced consultancy services for businesses, promotion of webinars and similar training activities to contribute to business development, collaborative online platforms e.g. to promote "buying local" and regional/local marketplaces, creating labour pools, etc. (EU Committee of the Regions, 2020[189]).

In several countries, support packages for the self-employed has been delegated to subnational governments because they are best informed about local conditions and needs. Since such support is comparable to social welfare for families and individuals, for which subnational governments are responsible in normal times, subnational governments are appropriately organised to carry out these measures (OECD, 2020[190]).

In the EU, based on the OECD-CoR survey, 30% of subnational government respondents indicated that they were providing large direct support to businesses and self-employed (e.g. subsidy schemes, regional funds for capital risks), in addition to coping with the health emergency. Moreover, 28% declared that they largely provided technical assistance and support services to local economic actors, 26% that they have already granted tax incentives and relief to businesses and self-employed (e.g. exemptions, reduced or deferred rent payments for the business premises owned by local governments) and finally 25% indicated that they supported them indirectly, by offering advantageous credit lines, guarantee schemes or repayable advances, for example (OECD-CoR, 2020[57]). In this area, regional governments and large municipalities (OECD, 2020[191]) were more active than smaller ones, reflecting their broad responsibilities in economic affairs, particularly in the most decentralised countries.

Territorial approaches to support vulnerable populations

Vulnerable populations are doubly affected by the crisis. First, because they are often more at risk from a health standpoint. Second, because they are particularly hard hit by the economic crisis. Subnational governments have undertaken proactive initiatives to manage the emergency and support vulnerable groups, including elderly people, people with chronic or long-term illnesses, disabled, poor households, homeless, underprivileged children and students, migrants, and other vulnerable populations, etc. Households without health insurance are also particularly vulnerable as they may be unable to access medical treatment, and may not be included in the case count. Indigenous communities are also particular fragile. Given the conditions in which these communities live, the threat of COVID-19 is aggravated due to factors ranging from poor health conditions and overcrowding, to the lack of access to adequate sanitation facilities. Indigenous populations are often also the most vulnerable in terms of economic consequences (Lustig and Tommasi, 2020[208]).

Social protection is a key responsibility of subnational governments (see section 1). In particular, municipalities, which are closer to the population, play a crucial role in social protection of the most fragile groups, which are physically and economically more exposed to the pandemic (OECD, 2020[191]).

Support measures to vulnerable groups are very diverse and include food/nutrition programmes for children and the elderly, meal and pharmaceuticals delivery, special care for the elderly and disabled people, emergency shelters and housing, vouchers to purchase essential goods, installation of sanitary facilities, exemptions or deferrals from rental payments for residents of social housing, mortgage payment assistance, waiver or relief of utility payments e.g. energy or water bill, emergency phone lines, engaging unemployed people in socially useful work, direct subsidies to pay for social services (e.g. early childhood services for children), prohibition of housing eviction, distribution of masks, etc. Subnational government expenditures related to social services and social benefits in EU regions and municipalities is anticipated to be the number one expenditure most impacted by the crisis (OECD-CoR, 2020[57]).

In some countries, local governments have worked with national government authorities, as well as with NGOs and community volunteers to meet the social challenges. In several countries, subnational governments also provide financial support to ensure the proper functioning of services provided by social economy organisations (EU Committee of the Regions, 2020[189]). These organisations have also been highly affected by the crisis, and they play a crucial role in in addressing and mitigating the impact of the COVID-19 crisis on vulnerable populations ( (OECD, 2020[209]).

Subnational governments and the use of digital tools to track the pandemic

Regional and local governments are increasingly mobilising digital tools to track and stop the spread of the coronavirus. Expanded use of digital tools for tracking and information purposes in the pandemic has served to: (i) inform decision-makers, helping them adopt appropriate measures and contain the pandemic; (ii) to communicate with citizens transparently, strengthening trust, which is key to ensure compliance with containment measures.

Digital tools have been crucial for regions and cities to better manage their immediate response to the crisis. Some new applications helped reduce the spread of COVID-19, and supported the gradual lifting of confinement measures by informing citizens if they were in proximity of people infected by the virus, and if so, encouraging them to inform health authorities, isolate and request support. Data tracking, as well as accurate and timely reporting, are essential components of crisis management, and can help prevent – or at least minimise – additional waves. Strong network effect may be at play as digital tools efficiency is increasing with the number of users.

The use of these tools has also raised challenging questions regarding data protection and confidentiality. While acknowledging the benefits that tracking apps may bring to crisis management, they also affect the privacy of information. While in many countries the legal framework does not permit this type of data use, in others the use has been easier to implement. In order to minimise the risks regarding privacy and data protection, the European Commission, for example, has developed guidelines and a toolbox for developing COVID-19 related apps aiming to guarantee sufficient personal data protection.7

Making use of digital tools for data monitoring and reporting is also proving essential to keep citizens well informed and improve the interaction between citizens and governments. Many jurisdictions have developed specific web sites to disseminate information on the crisis’ development, communicating daily, for example, the number of cases and new measures adopted. Even when there is no dedicated website, most cities and regions around the world provide information about the pandemic situation on their own website, and provide links to their Ministry of Health’s website, their country’s national COVID-19 platform, or to the WHO website. The realisation of the potential benefits of digitalisation in this matter depends crucially on the relevance, quality and user-friendliness of the information being generated by the digital systems and made available to the public. To ensure a good and efficient use, it is important to involve key stakeholders (CSOs and other groupings of users of public services) early in the process of designing these systems.

Accelerated digitalisation of services at the local level and digital divides across places

Confinement measures have accelerated the digitalisation of services, broadening the range of services provided on-line, including online administrative services, e-education and e-health. Trends towards the digitalisation of services were increasing even before the COVID-19 crisis. Across OECD countries, access to government services through digital portals has tripled since 2006 (de Mello and Ter-Minassian, 2020[225]). Prior to the crisis, the results of a survey on the use of digital information systems by local governments suggested that, on average, the degree of digitalisation was larger for local services in spatial planning, construction, tourism and culture and sports, and smaller for social services.

• Digitalisation of education: with more than 1.5 billion children outside of school during the confinement in spring 2020 (over 60% of the world’s student population) according to UNESCO, the COVID-19 crisis led to a massive shift towards e-education and online courses since March 2020 (UNESCO, 2020[226]). In a number of countries, local governments have broad responsibilities for delivering education policy. This puts them in the lead with respect to the digitalisation process, including in the current crisis context. Before the crisis hit, some regions and cities were spearheading the digital transition of education, particularly in Europe’s northern and western cities. Northern European regions, for example, provide a very wide range of digital services with online applications for admission, online monitoring of progress, and online learning materials (de Mello and Ter-Minassian, 2020[225]). With schools being closed, cities have been increasingly promoting the use of digital tools to continue classes. The challenge for local governments is twofold, as on the one hand they need to ensure online classes, and on the other they need to ensure equal access for all – a striking challenge especially in more disadvantages areas. Some cities (e.g. Fuenlabrada, Gdansk the Hague, and Madrid) are working to ensure equal opportunities for all pupils by providing low-income families with digital devices for their children to follow online school courses from home.

• E-Health services: in a context in which social distancing is a critical containment and prevention factor, e-health services offer important benefits, and their use has increased significantly since March 2020. This is especially true of e-prescriptions and telemedicine. In the US, some preliminary research shows that as the number of COVID-19 cases increases, so does the population's interest in telehealth. Local and regional governments can encourage such developments, especially in countries where health care is more decentralised. While e-health may be also a way to deal with territorial inequalities in access to health, support from the central level is crucial to ensure that the distribution of e-health is balanced throughout the territory by supporting the development of institutional and technical capacities. Some barriers to wider use, like access to broadband, will be difficult to tackle in the short term, highlighting the need to strengthen health care provision in rural and low-resource settings (OECD, 2020[227]).

Digital divides across regions and across urban-rural areas

The pandemic has also further revealed the digital divides within countries and has, in some cases, accelerated digital inclusion responses. In OECD countries, access to, and use of, the internet varies significantly within countries. Regional differences in the percentage of households with broadband access are strongly pronounced both in countries with a high ICT penetration, such as France, Israel, the United States and New Zealand, and countries with low average ICT access such as Mexico or Turkey (OECD, 2018[228]). In the US, for example, nearly 25% of 15 years old with disadvantaged backgrounds have no access to a computer. In the poorest regions of Italy, 42% of families have no access to a computer/tablet at home and 20% of 6-7 year-old children are in that same situation. In addition, substantial gap remains in access to high quality internet among urban and rural households. Across OECD countries, 85% of urban households vs 56% of rural households have access to high quality Internet (OECD, 2020[48]). This inequality gap risks being accentuated as some municipalities do not have the capacities to follow the digital transition in the short and medium term. To reduce this risk, local initiatives need to be accompanied by nation-wide initiatives to tackle the digital divide (de Mello and Ter-Minassian, 2020[225]).

E-Democracy at the local level

While there was a growing tendency among governments to adopt e-democracy tools (e-government, e-governance, e-deliberation, e-participation and e-voting), the pandemic has accelerated it. Regional and local governments, which were often reluctant to adopt such measures, have been forced by the circumstance to overcome this in order to ensure the continuity of their work. Proof of this is that many regional and local councils, for example, have moved to permit on-line debating and voting (de Mello and Ter-Minassian, 2020[225]).

Country examples

Supporting subnational finance

A majority of federal/central governments adopted a range of measures in 2020 to help subnational governments cope with the fiscal shocks. State governments in federal countries have also implemented measures to support local government finance. In several countries, such as the Czech Republic, Finland, France, Japan, Spain or Sweden, central/federal/state government support through emergency funds and compensation grants has limited the negative impact on subnational finance in 2020 (see section 1.3 “The fiscal impact on subnational governments”).

In 2021, some countries have announced the continuation of support packages, but they could be reduced depending on how the situation develops at the subnational level and at the national level. Many central/federal governments have absorbed the fiscal shocks of the COVID-19 crisis and substantially increased their deficit and debt. More governments target their support to subnational governments most affected by the crisis and/or confronted to specific socio-economic challenges (Austria, Chile, Costa Rica, France, Italy, Korea, Norway, Slovenia, Sweden, etc.). Previously, support was distributed quite uniformly because of the emergency situation. Now, governments have a better knowledge of areas and subnational governments that have suffered the most during the crisis.

Crisis and recovery plans provided an opportunity to initiate or accelerate local finance reforms in some countries (France, Iceland, Spain, England/UK, etc.). The objectives are diverse. They include the need to find ways to compensate for the (temporary or permanent) abrogation of some local taxes to accelerate the economic recovery (e.g. local business taxes in France, IRAP in Italy). They also aim at improving the resilience of subnational finance systems to cope with future crises and ensure more solidarity through equalisation and stabilisation mechanisms (e.g. reform of the Fiscal Stabilisation program in Canada). One objective is also to take into account long-term challenges such as demographic challenges that are generating a financing gap for the local government sector in many countries, such as Belgium, Finland, Japan or Sweden.

Four categories of supporting measures

The measures implemented in countries can be classified into four categories (Figure 21). They include revenue-side measures, expenditure-side measures, financial management measures and measures related to fiscal rules and debt, including to facilitate the use of debt for short and long term needs. Revenue-side measures and measures related to fiscal rules and debt seem to be the most frequently applied measures, although measures to improve financial management are also quite widespread. For example, in the EU, 46% of CoR-OECD survey respondents reported in 2020 that some fiscal rules have been relaxed or are planning to be (18%) in the near term (OECD-CoR, 2020[57]).

 

Figure 21. Measures to support subnational government finance

Source: Authors’ elaboration

Revenue-side measures include increasing existing inter-governmental operating and capital transfers or creating new funds to cope with specific needs (numerous countries, including Austria, Bulgaria, Chile, Czech Republic, Estonia, Finland, Flanders/Belgium, France, Germany, Italy, Korea, Japan, Latvia, Norway, Spain, Sweden, United Kingdom, etc.), accelerating grants and subsidies payment including increase and advance of EU structural funds (Austria), increasing/advancing revenues from non-tax revenues and from taxes, in particular subnational shares of national taxes (Austria, Finland, Canada, Latvia, Poland, Portugal), developing compensation schemes for the loss of taxes and fees revenues due to the recession or tax decisions (Wallonia/Belgium, Canada, China, Denmark, England/UK, Estonia, France, Germany, Italy, Norway, Netherlands, etc.), activating rainy-day funds and fiscal reserves (Czech Republic, Japan, Luxembourg, Mexico, Slovak Republic, United States, etc.).

In some countries, the activation of equalisation mechanisms has mitigated the differentiated impact of COVID-19 among subnational governments (Luxembourg, Switzerland, Germany). Although equalisation systems might help mitigate regional disparities, the effect could be limited and dependent on the equalisation system’s distribution formula. In addition, as many equalisation systems are funded either by appropriations from central government revenues or horizontal transfers among subnational governments, both of which may be susceptible to contractions in economic activity, there are some concerns about the sustainability of equalisation systems. According to a survey by OECD Network on Fiscal Relations, 8 out of 17 country respondents anticipate a fall in total equalising transfers, whereas only Canada anticipates an increase to one of its two equalising transfers (i.e. the Territorial Financing Formula). Overall, this suggests that equalisation systems may have a pro-cyclical impact on subnational finance (OECD, 2020[237]).

Expenditure-side measures have included easing spending responsibilities (Slovenia), reducing some expenditure items (taxes and contributions to be paid by subnational governments, e.g. Poland), supporting temporarily some spending costs (Germany), securing investments projects (Poland), adapting public procurement procedures (e.g. to buy personal protective equipment or testing and tracing equipment) and helping local governments to find savings and efficiency (Canada/Ontario).

Fiscal rules, whose purpose is to mitigate subnational fiscal risks through the imposition of constraints on fiscal policy, are susceptible to pro-cyclical tendencies if they are too rigid or subject to short time frames. During a crisis, it may be possible to relax such rules (budget balance rules, spending limits, etc.) along two lines, either formal escape clauses that can be triggered by prescribed circumstances, and/or an effective suspension of the rules in practice when it is unreasonable to expect subnational governments to comply (OECD, 2020[237]). Many countries have used these instruments such as Flanders/Belgium, China, Denmark, Germany, Iceland, Poland, Portugal and the Slovak Republic. Support measures also include relaxing debt prudential rules (Colombia, Poland, Portugal), reducing debt burden (Brazil, Italy) as well as facilitating the access to short-term borrowing and credit lines (with sometimes COVID-19 credit lines), developing access to long-term borrowing and capital markets (Mexico, COVID-19 bonds in China) in particular for EU co-funded projects (Latvia, Slovenia), or establishing municipal liquidity facilities (the Federal Reserve in the United States, Italy).

Finally, they include diverse measures related to financial management, such as limiting administrative burden by easing current regulations and promoting new practices. This covers a large scope of measures including budget management, accounting (France, Italy, Poland), developing the use of ICT in financial management, supporting the preparation of subnational forward-looking fiscal analysis and fiscal resilience plans, introducing more flexibility in staff management and contracts practices, help subnational governments fight against fraud and evasion, support local public companies such as regional and local public transport companies (Denmark, France, Italy).

These measures can be further divided according to the time span of the effects. For example, allocating additional grants to subnational governments permit a relatively quick compensation of lost tax revenue and increased expenditure. Transferring or creating new taxes or providing more taxing powers to subnational governments are effective in the medium and long terms, but not always adequate for responding to immediate needs. Also transferring service responsibilities from subnational governments to central governments is likely to be slower than transferring additional resources to subnational governments to secure service provision. Some measures are meant to be temporary, others can be implemented in a more permanent way.

Increases in central or state government transfers are likely to be insufficient to fully offset decreased revenues from taxes, user charges and tariffs, and property income. Furthermore, in the longer term, central government transfers will probably be cut to rebalance public budgets and restore fiscal stability, for example through future austerity measures. While in the short term the support from higher levels of government may help fill the fiscal gap created by the crisis, subnational governments need to prepare for the crisis recovery phase, and possible consolidation plans. The crisis is likely to have negative medium and long term effects on subnational government finances. Reforms that ensure the stability, the operational capacity and the resilience of subnational finance are important, and should be carefully planned and implemented.

Support to subnational government finance can also be indirect, by supporting related entities, such as public transport agencies, energy companies and other utility companies. In Germany, the federal government will take over the costs of housing benefit for welfare recipients from the municipalities (EUR 4 billion) and support local public transport networks (EUR 2.5 billion) (BNP Paribas, 2020[238]). In Latvia, municipal capital companies, whose turnover has decreased by 50% due to the COVID-19 crisis, may receive a state budget loan to increase the company’s share capital in order to finance its maintenance costs. In the US, the CARES Act includes USD 25 billion for transit agencies to compensate for part of the revenue gap.

The methods used to prepare these measures vary from country to country, depending on existing inter-governmental fiscal relations, and the culture and practices of dialogue and negotiation between the central and subnational governments. In countries where fiscal coordination is already well developed and effective, support measures have been developed and discussed between the different responsible ministries and representatives of subnational governments. In several countries, the discussions about urgent support, compensation schemes and other financial measures have been discussed and agreed upon with the national associations of subnational governments, resulting in formal agreements or more informal deals.

Country examples

• In Australia, the Australian Government, States and Territories signed a cost sharing arrangement at the start of the COVID-19 crisis to cover the public health costs incurred by States and Territories in treating the virus. On 29 May 2020, a new 2020-2025 health reform agreement was signed by the Commonwealth and the states and territories. It includes a guarantee to all states and territories that no jurisdiction is left worse off as a result of the COVID-19 pandemic (Federal Ministry of Health, 2020[239]). In addition, the Australian Government, in co-operation with the state jurisdictions and local government, is further examining and discussing methods of identifying the pandemic’s impact at the small area level (sub-state regions, local governments) and developing targeted recovery and reconstruction assistance that might be required in the medium and longer term.

• In Austria, the Government announced measures for supporting state finances in 2021, in particular special purpose grants up to EUR 1 million to finance equipment in the care sector. The federal states should also be involved in the implementation of the new "1-2-3 climate tickets" for public transports, favouring interregional mobility (Austrian Federal Ministry of Finance, 2020[240]). At the municipal level, the federal government has adopted a second municipal support package in January 2021, increasing the fiscal support for municipalities by EUR 1.5 billion to amount a total of EUR 2.5 billion. This package is made up of three measures: an increase in the municipal tax share for 2021; special advances on municipal tax shares; and an increase in structural funds for particularly financially weak communities (Wiener Zeitung, 2021[241]).

• In Belgium, regional governments announced support measures for local finance. Wallonia’s municipalities were allowed in 2020 to increase their budget deficit, and encouraged to use their reserves or to borrow to boost local economic recovery (La Libre Belgique, 2020[242]). On the revenue side, the Walloon region will provide in 2021 a financial aid of EUR 21 million to the municipalities and provinces under its jurisdiction, to compensate for the elimination of several local taxes and fees in 2020, particularly those affecting the restaurant, entertainment and tourism sectors (Wallonie Interieur SPV, 2020[243]). In Flanders, the Flemish Government adopted several measures in 2020 to support municipalities, including: a grant of EUR 15 million for poverty reduction as a result of the COVID-19 pandemic; an emergency fund of EUR 87 million to support local authorities in the culture, youth and sport sectors, a fund to stimulate sustainable mobility (e.g. local improvements for walking and cycling), and various subsidies for infrastructure and operation of a vaccination centre (Flanders National Administration Agency, 2021[244]). Flexibility has been allowed for the local budgets (subject to monitoring coronavirus impact) (Flemish Government, 2020[245]).

• In Brazil, in May 2020, the Federal government enacted a BRL 120 billion plan that included a variety of measures for states and municipalities. As part of this plan, states received BRL 30 billion in general use transfers and BRL 7 billion in transfers to cover healthcare and social services costs; municipalities received BRL 20 billion in general use transfers and BRL 3 billion in healthcare and social services transfers. The plan also included the suspension and renegotiation of debts with federal banks, permission for subnational governments to renegotiate loans with international bodies, and the suspension of municipal social security debts (BRL 5.6 billion) (FTI Consulting, 2020[246]). Furthermore, in August 2020, the federal government enacted a law to compensate municipalities and states for funding losses from the Municipality Participation Funds and the State Participation Funds. Using a different strategy, early on in the pandemic, the federal government supported municipalities by reducing the Import Tax on a list of medicines municipalities had deemed essential for tackling the pandemic (KPMG, 2020[247]).

• In Bulgaria, as part of the 2021 Draft Budget Proposal released in October 2020 the central government plans to provide additional transfers to municipalities to compensate their costs in relation to the adverse impact of the COVID-19 crisis. To this end, an additional BGN 15 million will be transferred to the municipalities in 2020. In 2021, the resources to recover the costs of the municipalities related to the pandemic are expected to amount to BGN 30 million. (National Association of Municipalities of Bulgaria, 2020[248]).

• In Canada, the federal government supported municipal finance in 2020 by providing advances from the Federal Gas Tax Fund. The Federal Government announced its intention to reform the Fiscal Stabilisation program to act as a more effective backstop to provinces that face extraordinary drops in revenue. Since its creation in 1976, the program provides financial help to any province faced with an annual decrease of more than 5% in its non-resource revenues, or of more than 50% in its resource revenues. Payments are currently capped at $60 per person for a given fiscal year (Government of Canada, 2020[249]). On top of that, the government also provided direct support to the provinces and territories (CAD 24 billion), part of the Safe Restart Agreement, a federal-provincial agreement to support subnational governments with increasing testing and contact tracing capacities, personal Protective Equipment procurement, and to fund enhanced sanitation measures to protect the elderly and most vulnerable. As part of this funding, CAD 2 billion is earmarked for helping municipalities manage COVID-19 operating costs and CAD 2.4 billion is for public transport. The federal government also created the Regional Relief and Recovery Fund, providing significant funding through Canada’s Regional Development Agencies. Provinces, which have jurisdiction over the municipalities, have also started to provide exceptional support to municipalities. This support will continue in 2021. For instance, the Province of Ontario announced in early 2021 CAD 500 million of additional funding to municipalities to help address operating cost increases due to the pandemic as well as to keep capital projects on track. Ontario is also supporting municipalities in finding budget savings and efficiencies through the Audit and Accountability Fund and Municipal Modernization Program (Province of Ontario, 2021[250]).

• In Costa Rica, the central government implemented some measures to relax fiscal spending limits for subnational governments. In addition, the central government is making a diagnosis of the economic and fiscal impacts of the pandemic on subnational governments to provide a differentiated response depending on the needs of each of them, in coordination with local authorities (IADB, 2020[251]).

• In Chile, the government provided for the transfer of more than USD 220 million from the Solidarity Fund (Fondo Solidario) to 342 out of 345 municipalities in the country with the purpose of address the COVID crisis and counteract the decrease in the income of subnational governments. A first instalment of USD 100 million was announced in May 2020, and a second one of USD 120 million in July 2020, (SUBDERE, 2020[252]).The amounts transferred were established taking into consideration the population of each municipality and their level of vulnerability (SUBDERE, 2020[253]). Whereas the funds were previously earmarked for extra expenditures related to the pandemic, such as the purchase of medicine, the second instalment was made for flexible, enabling municipalities to use the funds to cover their operating expenditures in general, to be spent until 2022. The 2021 Budget Law also provides for a liquidity advance to the municipalities that have seen their own income diminished during the pandemic, and more flexible terms of reimbursement (postponed to 2022). In November 2020, the mayors of the three national associations of municipalities signed a Protocol of Agreement with the Government, to formalise the financial support related the Covid-19 crisis (Portal Pirque, 2020[254]).

• In China, the Government continues the implementation of the committed transfers of CNY 2 trillion to local governments for fighting against the pandemic (ODI, 2020[255]). This is expected to be funded by allowing the deficit-to-GDP ratio to expand to over 3.6% (first time over 3%) for 2020, which adds CNY 1 trillion to the budget deficit, and by issuing CNY 1 trillion in special COVID-19 bonds that enable local governments to channel funds to where they are most needed. It is emphasised by the national government that special transfer mechanisms will be established to accelerate the implementation of these funds, which should not be retained or intercepted by the provincial level (Yicai, 2020[256]). In February 2021, the central government announced that for 2021 the deficit-to-GDP ratio will scale back to 3.2%, and no special COVID-19 bonds will be issued this year (S&P Global Ratings, 2020[257]).

• In Colombia, on 21 May 2020 the Colombian government announced a series of fiscal measures, including: more flexibility in the use of several sources of income to finance extraordinary operating expenditure (which are normally earmarked); the possibility to use resources from the National Pension Fund of Territorial Entities (Fonpet); the possibility to contract short-term borrowing (credit lines) that will not be counted in indebtedness ratios; and a relaxation of debt rules.

• In the Czech Republic, the central government has increased by 40% its transfers to municipalities to mitigate the decline of municipal tax revenues in 2020. Each municipality has received a bonus of CZK 1 250 per inhabitant, corresponding to non-earmarked grant. (Government of the Czech Republic, 2020[73]).

• In Denmark, fiscal rules have been temporarily eased for municipalities, lifting expenditure ceilings for both coronavirus-related operating expenditures and investments (Information, 2020[258]). The government also provided extra funding to local governments in order to cover for expenses related to the pandemic (e.g. protective equipment and sanitising in schools and day care centres) and to ensure that the level of service provision could be maintained (Ministry of Finance, 2020[259]). Following a concertation between the central government, the national association of local governments and Danish regions, it has been agreed that the regional transport companies will receive full compensation for additional expenses and loss of income as a result of COVID-19 throughout 2020. (KL, 2020[260])

• In Estonia, municipalities have received a financial support package of EUR 100 million from the central government to compensate the loss of revenue, to cover extraordinary direct costs of the crisis borne by municipalities, and to finance additional public investment that can stimulate economic recovery.

• In Finland, the central government has supported municipalities with relatively generous temporary grants and by increasing the municipal share of corporate tax revenue. With the decisions taken by end of year 2020, the central government COVID-19 support to municipalities amounts to EUR 5.1 billion during 2020 and 2021. This corresponds to about 6.6% of total municipal expenses (Finland Ministry of Finance, 2020[261]). The package consists of various specific compensation and support measures, which are defined mostly using a formula. The total support package includes, among others, EUR 600 million compensation to hospital districts (these are joint municipal authorities), EUR 520 million temporary increase in municipal share of corporate income tax revenue, EUR 2 billion compensation of direct costs caused by COVID-19 to municipalities, and EUR 1.4 billion increase in block grants (Statistics Finland, 2021[262]). The latest reports on municipal economic situation suggest that the central government financial support has been sufficient to cover the both the new spending and lost revenue caused by COVID-19 to municipalities. The compensation scheme for municipalities is based on formulas, which aim to measure the extra costs and revenue losses experienced by municipalities (Association of Finish Municipalities, 2020[263]).

• In France, the emergency plan of EUR 4.5 billion, announced in May 2020 took into account the fiscal situation of the different levels of government as well as the specificities of particular categories (e.g. touristic municipalities). The emergency focuses mainly on municipalities (EUR 1.8 billion) and departments (EUR 2.7 billion), to help them meet increased social spending requirements. The emergency plan comprises three main components: i) subnational governments will have the possibility to record COVID-19 related operating expenditure in a special account and to absorb them over three years or even to finance them through borrowing; ii) the current Support Grant for Local Investment (Dotation de soutien à l’investissement local or DSIL) will receive an additional EUR 1 billion; iii) guaranteed resources in 2020 for municipalities, based on government compensation for the loss in tax revenues and a portion of user charges (e.g. car parks), calculated by comparing the revenue in 2020 to the average for 2017 to 2019. These measures will be extended throughout 2021, together with new measures such as compensation for rent cancellation and support for public transportation (Vie Publique, 2020[264]). The announcement of the national recovery package in July 2020 triggered additional measures, including further support to subnational investment, as well as new fiscal compensatory measures following the lowering of taxes based on production (including the property tax on developed land – TFPB, and the local economic contribution - CET, which were devolved to local and regional authorities). To compensate for this loss, fiscal measures will provide, among others, the transfer of a portion of VAT to the regions to replace the regional share of CVAE, and compensation based on changes to the tax bases of production taxes for local authorities. Finally, the recovery strategy clearly states that a greater attention will be paid to directing resources and funding at local levels rather than within the central government, and that local authorities will be allowed to develop public policies more aligned with regional needs and deviate from the national laws, when appropriate (French Ministry of Finance, 2020[265]).

• In Germany, the Parliament has suspended the constitutionally enshrined “debt brake” thereby allowing Länder to run deficits to respond to pandemic induced fiscal pressures. Using net-funding pre-approved allowances, the Länder have been able to partially cover budget deficits in 2020 and have the flexibility to use any leftover funds from these allowances in the coming years to fund pandemic-related costs and revenue losses (Moody’s, 2021[266]). In addition, the Federal Government compensates declining revenues and provides additional grants to compensate crisis spending. For the local level, the federal and state governments have decided in September 2020 on an aid package to support cities and municipalities during the COVID-19 crisis and maintain municipalities’ investment capacity in the coming years. In particular, According to this aid package, the federal government covers for half of the municipalities' local business tax losses for 2020, and Länder cover for the other half. In addition, the central government also contributes to the costs of accommodation and heating of municipalities, increases the federal share in municipal welfare spending, provides additional capital grants for kindergarten, hospitals, public transport, digitalisation and local health services. This federal support comes on top of support provided by the Länder to the local governments. In particular, the Länder have decided to loosen the fiscal rules applied to municipalities by suspending the balanced budget rule and the duty for cutback measures as well as spending freezes. In addition, regulation for short term credits has been eased.

• In Iceland, in the framework of the Supplementary Budget for 2020 the central government is providing municipalities with an extra grant of ISK 30 million to address the challenges posed by Covid-19 in social services and child protection. This grant is dedicated to the most sparsely populated municipalities of the country (Ministry of Transport and Local Governmment of Iceland, 2020[267]). In December 2020, the government launched a public consultation relative to a bill on amendments to various laws related to municipalities and COVID-19. The bill was drafted in the Ministry of Transport and Local Government in collaboration with the Association of Icelandic Municipalities and the Municipal Debt Fund. The bill aims, among other, to ensure that municipalities have scope to make increased investments and meet the impending operating expenditure triggered by the pandemic. It also aims to authorise municipalities to deviate from the debt and balance rule of the Local Government Act until the year 2025, as well as to include temporary provisions in the Act on the Municipal Loan Fund, to facilitate lending to municipalities (Icelandic Association of Local Authorities, 2021[268]).

• In Italy, since March 2020, three fiscal packages with a direct fiscal impact in 2020 to counter the effects of the pandemic have been adopted, including support measures for regional and local governments: the Law Decree no. 18 adopted on 17 March (‘Cura Italia’ decree); the Law Decree no. 34 adopted in May (‘Recovery’ decree) and the Law Decree no. 104 adopted in August 2020 (“August decree”). Measures includes additional resources to compensate for additional costs incurred by local and regional governments to allow them perform their functions. In total, the additional funds for local governments amounted to EUR 5.17 billion for 2020 (of which EUR 4.22 billion for the municipalities) while extra funds for regional authorities and autonomous provinces mounted to EUR 4.3 billion (EUR 2.6 billion for the autonomous provinces and € 1.7 billion for ordinary-statute regions). In addition, additional resources have been allocated to make up for the lower revenues from local taxes (€ 86 million); to support local public transport and regional railways and to support local authorities with a structural deficit (€ 180 million) and for regional disputes (€ 210 million). . As part of the August Decree, Southern Italy should be given as special treatment. The Decree N°34/20 also supports the debt of regional and local authorities, by enabling them to renegotiate or suspend mortgages and other forms of loans contracted with banks, financial intermediaries and Cassa Depositi e Prestiti during 2020. The Decree also established a fund of EUR 12 billion to ensure an advance of liquidity for the payment of certain liquid and due debts of regional, autonomous provincial and local authorities and national health service bodies in 2020. Measures supporting subnational investment have also been adopted (Italian Ministry of Finance, 2020[269]). Finally, accounting rules for local authorities were amended to allow local authorities to use the free portion of the administration surplus, as well as proceeds from buildings permits and sanctions, to finance current expenses related to the epidemiological emergency in 2021.

• In Korea, the government implemented several financial packages to stimulate the economy, including measures to support local governments. The First Financial Stimulus Package of KRW 4 trillion included a policy support related to internal and local tax. The 2020 Supplementary Budget amounted to KRW 11.7 trillion including support to most severely hit areas for Daegu City and North Kyeongsang Province (MOEF, 2020[270]; Government of Korea,, 2020[231]). Support to local governments, in particular for the recovery, are also included in the Korean New Deal.

• In Latvia, the draft budgetary plan 2021 provides for an increase of local government special grant by 10%, compared to the previous year, as well as a redistribution of the PIT between local governments and the central government (75% versus 25% respectively, compared to 80% and 20% respectively in 2020). The government also increased the local governments borrowing limit (Latvian Ministry of Finance, 2021[271]).

• In Luxembourg, in a circular of May 2020, the Ministry of Interior indicated the possibility of activating several mechanisms to limit municipal budget deficits and offset and cope with spending needs, including the use of rainy days funds, the activation of the local conjonctural equalisation fund (Fonds communal de péréquation conjoncturel - FCPC) and borrowing.

• In Mexico, the Stabilisation Fund for Federal Entities (Fondo de Estabilization de Ingresos de las Etidades Federativas - FEIEF) is a rainy day fund managed by the federal government. In July 2020, the federal government transferred MXN 10 billion to federated entities through this fund, to compensate for the reduction in grants from the central government due to the economic crisis (El Economista, 2021[272]). 20% of this amount is earmarked to supporting municipalities (Aristegui Noticias, 2020[273]). However, the resources for this fund come from oil revenues and federal contributions, which are declining (Fitch Ratings, 2021[274]). To mitigate the impact on state governments, transfer of the Fund's resources have been carried out monthly, rather than quarterly. The government is considering additional measures to ease the financial pressure on state and municipal governments, including federal transfers and modifying some regulations to allow greater access to financing on capital market.

• In the Netherlands, the government and the association of municipalities (VNG) concluded agreements on the compensation of various additional costs and lower income due to the coronavirus measures. In some areas, specific agreements have been made about how compensation levels from fellow authorities will move with the crisis, such as compensation for loss of income, extra costs of regional municipal health services (GGD) and safety; extra costs arising from the Temporary COVID-19 Act, including in ​​Supervision and Enforcement; extra costs related to public transport; and temporary self-employment income support and loan scheme (Tozo).

• In Norway, municipalities were compensated for the effects of the COVID-19 outbreak with a total of NOK 17.7 billion in 2020. Direct additional financial support was provided to municipalities and counties to compensate for COVID-related expenditure and loss of subnational revenue. Funding is provided as general subsidy, with a share of discretionary funds. A specific fund has been set up for the most vulnerable municipalities. The Minister of Local Government and Modernization has asked the county governors to map the situation in the municipalities in their county in order to identify which municipalities have had particularly large costs as a result of the corona crisis, to determine which municipalities will received the funds (Ministry of Local Government and Modernisation, 2020[275]).. These measures were designed in collaboration between representatives of the state and subnational governments, through a Working Group set up by the government for assessing the economic consequences the pandemic has had for the municipalities, whose work will extend until August 2021 (Ministry of Local Government and Modernisation, 2020[276]).

• In Poland, the government has established anti-crisis packages called “Anti-crisis shield”. In March 2021, this was the version 8.0. Support measures for local governments were included in the “Anti-crisis Shield 4.0” adopted in June 2020. Aimed at compensating for the decrease in revenues, especially tax revenues, the Act include a range of measures targeted at subnational governments: higher share for counties and cities with county status of income through the management of State Treasury's real estate; possibility for 2020 to exceed the ratio of balancing current income and expenditure by the amount of a loss in income caused by the COVID‑19 epidemic; relaxation of debt rule (possibility to increase the debt limit by the amount of factual decrease in tax income; possibility to postpone the payments made by local governments (e.g. taxes paid by local governments to the State Treasury; increasing the flexibility of utilising the funds from the tax on alcoholic beverages in 2020 and advance payments on grants (Government of Poland, 2020[277]). The Government has also established a Local Investment Fund (see below).

• In Portugal, it was announced that municipal expenditures incurred to combat the COVID-19 crisis will fall outside the debt limits provided for in the Local Finance Law. The relaxation of balanced budget rules and spending rules were also approved, as well as the postponement of cash reimbursement to the Municipality Recovery Fund (Ministry of Finance, 2020[278]). Furthermore, the authorisation of short-term loans was simplified and recourse to medium long term borrowing was facilitated (i.e. no prior authorisation needed from the municipal assemblies). In addition, local authorities can request advanced/early transfers of their portion of state taxes. Support to municipal treasuries also includes the possibility of using accumulated fiscal year balances of past years.

• In Russia, support for regional governments falls into two categories: structural measures and liquidity support measures. Structural measures include increases in federal government transfers and the temporary removal of legal limits on budget deficits and debt burdens (S&P Global, 2020[279]). In the first eight months of 2020, the regions received RUB 2.13 trillion in transfers from the federal government, a RUB 697 billion increase compared to the same period in 2019. For 2021, the regions are expected to receive RUB 100 billion in grants from the federal government (Intellinews, 2020[280]). Liquidity support measures include deferral of budget loan payments, a short-term treasury facility, and the ability for regions to provide budget loans between themselves (S&P Global, 2020[279]). The budget loan payments deferral will last until 2034, with the newly freed up sums being used by regions to support pandemic measures (Klimanov et al., 2020[281]).

• In the Slovak Republic, the Lex Korona Package announced on March 31 provides support measures to cities, municipalities and higher territorial units (regions) in order to help them finance extraordinary expenses and fill the loss of tax revenues. Until the end of 2021, local governments will be able to use reserve funds, capital income and loans for their current expenditures. In addition, several budgetary rules have been softened, such as the possibility to receive advances from public funds, relaxation of fiscal discipline rules, including possibility to incur a budget deficit (Slovak Republic Ministry of Finance, 2020[282]).

• In Slovenia, the draft budget for 2021 mentions the adequate financing of municipalities, and highlights their needs. It recognises that the country’s development is based on the development potential of municipalities, and their role in the absorption of European funds. In November 2020, the Committee on Internal Affairs, Public Administration and Local Self-Government discussed and approved the proposal for the Financial Relief of Municipalities Act (ZFRO). The basic proposal of the ZFRO is that the state will take over the financing of compulsory health insurance from municipalities for unemployed Slovenian citizens and foreigners. Other measures include additional funding for municipalities with Roma settlements, enabling municipalities to borrow for “soft” investment European projects, and the more flexible use by municipalities of investment subsidies from the state, to be used as current transfers ( (ZMOS, 2020[283]; Republic of Slovenia, 2020[284]).

• In Spain, the Royal Decree-Law 8/2020 on extraordinary urgent measures to face the economic and social impact of COVID-19 includes a measure to support local finance. Local governments are allowed to use their surplus to finance expenses corresponding to social services. An Extraordinary Social Fund was also created. At the regional level, a dedicated fund was established for the Autonomous Communities to combat the coronavirus and mitigate the emergency’s economic effects. The fund is earmarked to three main spending categories: healthcare (EUR 9 billion), education (EUR 2 billion) and compensating for the decrease of economic activity (EUR 5 billion). Funding is distributed based on a variety of criteria, including incidence of the virus in the territories, intensive care admissions, and population. This COVID-19 fund will not be accounted as regional public debt, and Autonomous Communities are responsible for its allocation within their territories (WHO, 2021[285]). Individual Autonomous Communities have, in parallel, developed support schemes for the municipalities within their jurisdictions. The Catalan Government developed funding stream to cover local administrations’ expenditures related to COVID-19. Andalusia unveiled an Exceptional Financial Collaboration Programme, dedicated to local entities with a population equal to or less than 1 500 inhabitants, with the aim to reinforce and guarantee the provision of public services during the crisis (Junta de Andalucia, 2021[286]).

• In Sweden, in September 2020, the central government presented amendments to the 2020 budget and its budget proposal for 2021. It approved an additional SEK 10 billion in general transfers to municipalities (receiving 70% of the total subsidy) and regions (30%) for 2021 and SEK 5 billion for 2022. This is in addition SEK 5.5 million in support to municipalities to cover COVID-19-related costs in 2020, including enhanced crisis support, counselling and trauma support for staff working in health care and elderly care. The government is also investing SEK 250 million for 2021–2023 to establish a new municipal delegation. The purpose is to support individual municipalities and regions with major challenges (Ministry of Finance of Sweden, 2020[287]).

• In the United Kingdom, additional resources for devolved administrations are allocated to the three devolved nations to cover health expenditure, local government support, and public transport expenditure. The global envelope of almost GBP 19 billion of funding for 2020 is broken down into GBP 9.7 billion for the Scottish Government, GBP 5.85 billion for the Welsh Government and GBP 3.3 billion for the Northern Ireland Executive. The extra funds are allocated through the Barnett formula, on top of regular allocations. A further GBP 2.4 billion was announced for 2021-22 to be channelled through the Barnett formula (GBP 1.2 billion for the Scottish Government, GBP 740 million for the Welsh Government, GBP 410 million for the Northern Ireland Executive), and GBP 1.4 billion of funding outside the Barnett formula (HM Treasury, 2021[288]). The devolved administrations decide how to respond to COVID-19 in their areas, including through emergency financial assistance to local authorities (Institute for government, 2021[289]). Regarding local councils in England, the UK Government delivered financial support up to GBP 10 billion, divided between a first package of GBP 7 billion in 2020 and an additional one of approximately GBP 3 billion in 2021. The 2021 package was the result of a public consultation launched in early 2021. Out of the GBP 3 billion, 52% are transferred as non-earmarked grants for local councils, 27% are part of a guarantee scheme to make up for 75% of local tax losses for 2020-21 and 22% are dedicated to supporting councils engaged in reducing council tax bills. New measures also include the extension of the Sales, Fees and Charges income support scheme until June 2021. This scheme aims to compensate local councils for losses generated by service delivery, up to 75% of the claimed loss, including a 5% deductible rate (UK Government, 2021[290]) The devolved administrations have also implemented their own measures to support local authorities. In Wales, this consisted mainly in increasing current transfers from the Welsh Government to local authorities by 3.8% in 2021-22 (Welsh Parliament, 2021[291]). The Scottish Government, for its part, set up a GBP 30 million Discretionary Fund, which is distributed as a one-off grant to each local authority to help them provide additional support for businesses in their area. This fund seeks to empower local authorities to direct additional financial support to the business community, where they consider this to be specifically necessary, based on the distinct characteristics of their local economies. (Scottish Government, 2021[292]).

• In the US, out of the USD 2 trillion Coronavirus Aid, Relief, and Economic Security (CARES), USD 150 billion in grants were set aside through the Coronavirus Relief Fund to help state and local governments cover costs directly related to the coronavirus. The CARES Act also allotted USD 30.75 billion to the Education Stabilization Fund. CRF funding was generally transferred to state governments based on their population, or could be directly channelled to local governments with a population over 500 000 inhabitants. Originally, the CRF could be used in support of not previously budgeted expenditures related to the coronavirus incurred between March 1 and December 30, 2020 (Congressional Research Service, 2021[293]). In addition, the Families First Coronavirus Response Act, raised the share of Medicaid allocated to States by 6.2 percentage points. The date for the use of funds was extended to 31 December 2021 through the Consolidated Appropriations Act of 2021 (US Department of the Treasury, 2021[294]). Furthermore, to help state and local governments manage cash flow stresses caused by the coronavirus pandemic, the Federal Reserve established a Municipal Liquidity Facility offering up to USD 500 billion in lending to states and municipalities (Federal Reserve, 2020[295]). These measures have been complemented by the State and Local Coronavirus Fiscal Recovery Funds legislation, passed in February 2021 part of the American Rescue Plan Act of USD 1.9 trillion. The bill includes a package of USD 350 billion (split between USD 195.3 billion for states, USD 65.1 billion for counties and USD 65.1 billion for municipalities, USD 20 billion for tribal nations and USD 4.5 billion for US territories. Allocation formulas vary across the types of subnational governments: states’ allocations will be based on the share of unemployed workers, whereas the municipalities’ allocation will be based mainly on population and poverty, and the county’s one on each county’s share of the total US population (Center on Budget and Policy Priorities, 2021[296]).

National investment recovery strategies

Immediate fiscal responses to COVID-19 focused on supporting firms and households. Since June 2020, many national governments have announced large economic recovery packages, focusing largely on public investment. Next Generation EU, the recovery plan for the European Union (Box 5), will bring additional public investment stimulus. These investment recovery packages have sought to stimulate employment and economic growth, while maintaining a longer-term focus on three broad priorities: (i) strengthening health systems; (ii) digitalisation; (iii) accelerating the transition to a carbon neutral economy. The OECD and the IMF have made a strong call to scale-up public investment to address the challenges for COVID-19 recovery. Subnational governments play a key role in this area as they are responsible for 57% of public investment in OECD countries.

It is important for investment recovery strategies to have an explicit territorial dimension. Although this seems to be more visible in some countries, for example in Australia, Canada or France, it is still a challenge in many. It is also crucial to actively involve subnational governments in their implementation early on, and not only municipalities, but regions as well.

Quality infrastructure investment is part of the answer to the COVID-19 crisis (OECD, Forthcoming[297]). National and subnational governments need to invest more – by better exploiting the existing and potential fiscal resources for investment and mobilising private investment. The IMF Fiscal Monitor estimates that a 1% GDP increase in public investment in advanced economies and emerging markets has the potential to push GDP up by 2.7%, private investment by 10%, and to create between 20 and 33 million jobs, directly and indirectly (IMF, 2020[210]). Local, regional and national governments also need to invest in a smarter way, by prioritising needs, focusing on post crisis priorities in health, digital and environment infrastructure and better managing public investment at all levels of government (OECD, Forthcoming[297]).

The demand for infrastructure was already high before the COVID-19 crisis, not only for new construction but also for operating and maintaining existing stock. For example, it was estimated by the OECD in 2017 that USD 95 trillion in public and private investment will be needed in energy, transport, water and telecommunications infrastructure, globally, between 2016 and 2030 (OECD, 2017[298]). Cities and regions have important needs for maintenance and new investment in renewable energy, low-carbon buildings, energy efficiency, waste and pollution management systems, and clean public transport. Developed countries will have to invest heavily in infrastructure, in particular to maintain, upgrade or replace existing (and often obsolete) infrastructure. US infrastructure, for example, is in need of investment, according to the American Society of Civil Engineers, which estimates that the US needs to spend some USD 4.5 trillion by 2025 to repair the country's roads, bridges, dams and other infrastructure, such as schools and airports. Similar issues are evident in Europe. In Germany, the KfW, Germany’s state investment bank, calculated that municipalities need to spend at least EUR 138 billion to bridge the backlog of urgent infrastructural investments.

Public investment programs at national and subnational government levels aim to stimulate short and medium term employment and economic growth while also addressing long-term priorities and maintaining good investment practices. Governments can balance these priorities through their choice of investments and investment strategies. Large investment projects, such as new transport infrastructure, take many years to plan and deliver, meaning that any stimulus effect will arise over a long period (International Transport Forum, 2021[299]). Smaller investment projects, or scalable investment programs, can be implemented more rapidly but should still address long-term priorities and should avoid being implemented without inter-governmental coordination. To balance these priorities, many governments are seeking to deliver timely public investment by using existing investment frameworks and by directly distributing additional funding to regional and local governments (e.g. US, Australia, European Union). Investing in known maintenance backlogs (where the underlying infrastructure is not becoming obsolete) can help to address long-term priorities and allow the use of existing delivery processes, which should support timely and better quality investment. Targeting and distributing investments to regional and local governments can allow for the territorialisation of investment recovery strategies in line with local needs and may be one of the quicker ways to deliver investments (International Transport Forum, 2021[299]).

Investment recovery strategies need to be well targeted to a few priority areas, well-coordinated across levels of government and well managed, as highlighted by the OECD Recommendation on Effective Public Investment across Levels of Government (OECD, 2014[300]). Recovery investment strategies should align with ambitious, long-term policies to tackle climate change and environmental damage. Post-crisis recovery strategies are a unique opportunity for governments to allocate recovery funds to sustainable initiatives and take measures to reduce the carbon-intensity of economic activities. Technologically advanced, sustainable and resilient infrastructure can pave the way for an inclusive post-COVID economic recovery (WEF, 2020[301]). It is also essential to look beyond physical infrastructure investment, and consider investment needs in skills development, innovation and R&D. It is particularly important to ensure that investments from stimulus packages do not impose large stranded asset costs on the economy in coming decades, for instance because they bet on declining technologies or place projects in high-risk flood zones (World Bank, 2020[302]).  

It is important to draw some lessons and avoid mistakes made with the 2008 crisis when considering investment recovery strategies associated with the COVID-19 crisis (OECD, 2020). While many public investment projects can be launched in the short-term, care must be taken not to focus on speed as the only criteria. A balance needs to be found between atomising funding in small infrastructure projects, to spend the money rapidly, and investing in larger and long-term priorities (e.g. sustainability and resilience). In the implementation of investment recovery strategies in 2008-09, funding was sometimes fragmented into small projects at the municipal level – rather than the regional level. For example, while Spain’s 2008 investment recovery plan allowed for joint applications through the state fund for local investment, most municipalities did not use this option. Only six out of more than 1 000 associated municipalities applied for project funding. For the COVID-19 recovery, intermediary levels of government – regions, states, provinces – should be included in implementing national investment recovery strategies. Regional and local governments should be supported to develop the required capabilities to manage investment programs where they do not already have them.

Supporting subnational public investment

Public investment by subnational governments will be a crucial part of the recovery from the COVID-19 crisis. Subnational governments are responsible for 57% of public investment in OECD countries and they are at the frontline of managing the crisis. Furthermore, subnational governments are able to deliver a territorial dimension in recovery plans that accounts for the social and economic shocks on local economies, which is particularly important given the heterogeneous impacts of COVID-19 on regions. Subnational governments, however, are particularly vulnerable to the financial impacts of COVID-19 crisis and may need to build new capabilities to support effective public investment.

To a large extent, the fiscal impact of the COVID-19 crisis on subnational governments depends on the support provided by central or federal government to maintain, or boost subnational investment through stimulus packages (capital transfers), as well as to build the capacity of subnational governments to access long-term borrowing. While watching the sustainability of public finances over the longer-term, it is important for countries to avoid replicating the scenario that took place after 2010, when drastic cuts in subnational public investment created a pro-cyclical effect impeding the recovery. In some regions and cities, public investment projects are already cancelled or postponed.

More than two-thirds of subnational government respondents to the OECD-CoR survey stated in July 2020 that the transition to a sustainable and low-carbon economy should shape long-term regional development policy to a large extent. This contrasts with the fact that less than 50% of respondents were then considering the use of exit plans and recovery strategies to promote a greening policy or sustainability agenda. It is critical that subnational governments make the most of their recovery strategies by integrating green and climate priorities.

Different instruments are being activated to maintain, or even accelerate, public investment projects at the subnational level (Figure 22). In addition to improving self-financing capacity i.e. gross savings, these include various classical fiscal instruments: relaxing budget rules, increasing capital transfers and subsidies, easing the access to long-term projects on both credit and financial markets and supporting projects preparation and implementation. Other financing mechanisms may be activated in the future such as public-private partnerships schemes or equity financing.

 

Figure 22. Boosting public investment at subnational level

Source: Authors’ elaboration

In the EU, only a minority of national authorities have been actively involving local and regional authorities in their consultations to prepare national Recovery and Resilience Plans (COR-CEMR, 2021[303]). Their involvement in the governance process appears to be even lower than in the previous years’ amid little willingness from national governments to involve subnational governments, strong decision-making centralisation and the lack of effective discussions across levels of governments. In some countries, subnational governments receive transfers from higher levels according to a block grant formula, as in the United States (Vox, 2021[304]). In countries where local authorities are invited to apply to get specific grants, as in France, they may face tight deadlines or lack the technical and staff resources to apply to national recovery programs and receive additional funding successfully. Disparities across regions may lead to uneven public investment dynamics in the short term.

In some instances, governments have placed conditionality on the financial support provided for subnational public investments. This seeks to align financial investments to longer term national or supranational priorities. An examples of this includes the European Council recovery package (European Council, 2020[305]), which allocated a portion of stimulus funding to health, digital and climate objectives.

Building subnational public investment capacity

Effective public investment by subnational governments requires the appropriate capacities to be developed. In line with the guidelines provided in the OECD Making Decentralisation Work: A Handbook for Policy-Makers (OECD, 2019[306]), subnational capacity is required to support the performance of functions effectively, efficiently and sustainably. Subnational government capacities vary enormously within countries. Smaller municipalities are hampered by having an inadequate pool of managerial and technical talent and service providers. Larger municipalities, on the other hand, face complex transport, urban planning and infrastructure tasks and do not have always the workforce skills to address these tasks effectively. In some countries, subnational governments can have less public investment management capacity than national governments (Inter-American Development Bank, 2020[307]).

Country examples

Vertical coordination among national and subnational governments

Coordination among national and subnational governments is the “first step of an effective response”, as stated by the World Health Organisation (WHO) at the pandemic’s outset. Non-coordinated action among levels of government can generate collective risks, such as “passing the buck”, and conflicting responses. In places where subnational governments operate with high degrees of autonomy, policy responses are more likely to be fragmented. In countries where bottom-up coordination and communication is weak, there is a greater possibility of operating with one-size-fit-all measures that may not address local needs. These problems can be avoided or curbed through effective vertical coordination.

Many countries have experienced coordination challenges between national and subnational governments. Less than half (49%) of respondents representing subnational governments in the EU believe that vertical coordination mechanisms with the national government have been effective in managing the COVID-19 crisis in their country (OECD-CoR, 2020[57]).

Associations of regional and local governments are playing an important role in supporting vertical coordination. On the one hand, they act as interlocutors between national and subnational governments On the other hand, they continue to coordinate efforts, identify solutions, and support the implementation of emergency measures. Regular dialogue between the national government and these associations can be particularly valuable to address crisis-generated social and economic damage throughout a country. The coordination bodies established during the crisis should continue to be mobilised to coordinate and communicate response and recovery strategies.

To support the recovery from the crisis, national governments can use or adapt existing multi-level governance frameworks and processes to direct public investment at subnational levels. Using existing frameworks may support a more prompt adoption of recovery plans and provide higher certainty of outcomes, as the existing mechanisms already have a common understanding. Further to this, national governments should continue the increased use of vertical coordination displayed during the crisis to support the planning and execution of recovery strategies. This includes focusing on clarity of roles and responsibilities across different levels of government and establishing coherent guidelines for each level of government, while ensuring sufficient flexibility for adjustment to situations ‘on the ground’.

Supporting cross-jurisdiction cooperation

Horizontal cooperation across jurisdictions – be they countries, regions, or local governments – is just as important as vertical cooperation, particularly in in decentralised and federal countries, which have more differentiated approaches across territories. Externalities linked to the coronavirus are so high, that no single jurisdiction, or country, can manage these on its own. Coordination across regions is essential to avoid disjointed or contradictory responses, which pose a collective risk to a country’s population. For example, in federal systems, there may be limited incentive for cross-jurisdiction cooperation (e.g. sharing equipment, skilled personnel, etc.) if supporting a neighbour jeopardises one’s own ability to adequately respond to a crisis situation. Cooperation is an imperative – and not an option. The role of national governments is essential in minimising coordination failures and ensuring a coherent approach, even in federal countries.

Cooperation across jurisdictions is fundamental to limit the risks of new waves of infections or to mitigate the impact where cases have already rebounded. Information about new cases and clusters needs to be communicated extremely quickly to avoid propagation – across states and regions, and especially among municipalities belonging to the same functional area.

Cross-jurisdiction cooperation is also required to support recovery efforts and avoid a fragmented approach to public investment recovery strategies. Cooperation among jurisdictions can encourage better planning of neighbouring investments, support joint borrowing programs, ensure better coordination of resources during the recovery, support the standardisation of guidelines and encourage knowledge-sharing among jurisdictions. Regional and local governments can learn from the successes and missteps of other jurisdictions during the recovery.

The assessment by EU subnational governments on the effectiveness of horizontal cooperation mechanisms is very heterogeneous across categories: 75% of inter-municipal groupings (IMC bodies) and 55% of regions consider they have been effective in managing the crisis compared to 42% of municipalities (OECD-CoR, 2020[57]).

Such cooperation extends across-borders, too. A critical issue emerged in cross-border regions where cooperation has been made more difficult because of borders closure, restrictions on mobility in particular for cross-borders workers, and the lack of effective coordination arrangements. In many cases, EU Member States have implemented uncoordinated border closures and unilateral measures. In Nordic countries, the failure to leverage existing collaborative coordination platforms and the lack of communication between states undermined local governments authority on service provision along borders (Nordregio, 2021[356]). In the OECD-CoR, the lack of cross-border coordination was the strongest coordination issues. Around one-third of respondents reported that cross-border cooperation between subnational governments was broadly ineffective or non-existent, while only 22% found such cooperation effective or very effective (OECD-CoR, 2020[57]). However, several cross-border cooperation mechanisms did function well through the crisis and, arguably, allowed for increased resilience and paving the ground form reinforced cooperation (EU Committee of the Regions, 2020[189]).

A centralised or decentralised approach in equilibrium

The COVID-19 crisis has revealed advantages and disadvantages to both highly centralised and highly decentralised approaches. For instance, a centralised approach to managing aspects of the public health emergency can support a rapid and uniform response across a country, overriding potential inequalities, be they in resource capacity or in the treatment of individuals (e.g. quarantining those who traveling from a specific country, state, region or province). This is evident in the ability of national governments to transfer patients from hospitals in highly affected regions to less affected ones, as seen in France. In the early days of the pandemic, for example, the French government transferred patients from hospitals in the most affected regions, such as Grand-Est to those less affected in the South. It can also facilitate quick information and knowledge sharing, which is essential in times of crisis (Silberzahn, P., 2020[364]). On the other hand, a decentralised system can support greater flexibility and experimentation in the face of uncertainty, making room for “bottom-up”, innovative approaches (Silberzahn, P., 2020[364]) that can be applied elsewhere, if successful and appropriately adapted. The multi-pronged “Veneto approach” to controlling the COVID-19 virus originated in a single Italian town, Vò-Euganeo, then extended to entire Vento region and was eventually adopted, in part or in full, by other Italian regions. Additionally, decentralised approaches create space for regional and local governments to react and respond quickly. The decentralised networks of German laboratories were instrumental in realising the proactive testing strategy put in place by the country.

Furthermore, COVID-19 is reinforcing centralisation/decentralisation as a means to achieve objectives and not an end-state (OECD, 2019[306]). A good illustration is the fact that some governments are temporarily recentralising while others are temporarily decentralising in order to manage the crisis. Many countries adopted state-of-emergency laws, giving central or federal governments the right to take over some subnational responsibilities. By contrast, some countries decided to decentralise additional powers to subnational governments, at least temporarily. For example, Switzerland has temporarily recentralised health management in response to the crisis. In the early days of the pandemic, the UK temporarily decentralised health management, and as the pandemic continues the government is evaluating how to engage more with devolved governments.

Successful short, medium and long term responses to the coronavirus-induced crisis does not depend heavily on whether a country is federal or unitary or on its degree of decentralisation. Rather, it depends more on the coordination mechanisms applied, as well as on the ability of government actors to align priorities, implement joint responses, support one another, and foster information sharing, including with citizens (OECD, 2019[306]). The crisis is accentuating the importance of a risk management strategy, a clear assignment and understanding of responsibilities among levels of government, particularly in responding to a crisis, and of ensuring properly funded mandates at the subnational level. This contributes to meeting the immediate needs that keep arising, but also to ensuring future capacity to do so.

Emergency or crisis situations demand rapid response capacity to prevent escalation and control damage. The ability to adapt to uncertainty and change, and to course correct as needed becomes central to successful crisis management. Because an emergency’s immediate impact is felt locally, regional and local governments need room to act quickly, effectively and responsibly – regardless of whether they operate in centralised or decentralised contexts. Such capacity, however, can frequently depend on having sufficient flexibility and discretion to mobilise resources, for example, or to make and enact decisions that can help mitigate or prevent further crisis-induced damage. It can also mean temporarily or permanently reducing burden and red-tape surrounding administrative procedures, making it easier for subnational governments to fulfil responsibilities and take decisions, and for eligible businesses and citizens to apply for and receive emergency support.

Finally, managing COVID-19’s differentiated impact requires a degree of flexibility to allow for territorial responses that are place based and adapted to the most pressing needs and the preparedness of specific localities. This is can support a region in taking non-sequential but coherent action – addressing the emergency, containment and recovery demands based on the pandemic’s status in a region. This differentiated territorial approach is as apparent and relevant in federal or highly decentralised countries as it is in unitary or highly centralised ones. The importance of a place-based approach in response to the health crisis has consistently grown. In many countries specific measures regarding masks, closure of schools or restaurant closures, and full versus partial lockdowns are adopted for specific localities and territories, rather than applied to the national level, to limit the economic impact.

Good coordination minimises the risk of crisis management failures

A coordinated response by all levels of government, in both federal and unitary systems, can minimise crisis-management failures. Many countries with past experience in crisis management seem better prepared to tackle the COVID-19 crisis in terms of coordination. The main risk of non-coordinated action in a crisis is to “pass the buck” to other levels of government, which can result in a disjoined response and generate collective risk. For example, in federal systems, there may be limited incentive for cross-jurisdiction cooperation (e.g. sharing equipment, skilled personnel, etc.) if supporting a neighbour jeopardises one’s own ability to adequately respond to a crisis situation. Horizontal coordination is essential to minimise coordination failures and avoid disjointed responses that can lead to collective risk. Countries are approaching this in a variety of ways and at different levels of government.

When consulted on how to manage a successful exit strategy, respondents to the OECD-CoR survey indicate coordination and financial resources as of utmost importance: 90% of subnational governments report that coordination in the design and implementation of measures among all levels of government is very important, and 79% cite additional financial resources for subnational entities as being very important. Communication with the public and the possibility to adapt measures to the local situation are also considered as key in a successful exit strategy (Figure 25). While results are broadly homogeneous between the different subnational government categories, regions and municipalities have slightly different priorities. Regions place more emphasis than municipalities on adapting exit measures to the local context (76% versus 68%), while municipalities are more likely than regions to highlight the need for additional human resources (48% versus 33%).

 

Figure 25. Policy tools at the core of a successful exit strategy

Note: Subnational governments submitted their answer to the survey in June-July 2020

Source: (OECD-CoR, 2020[57])

The more decentralised the country, the greater the need to mobilise coordination platforms to minimise the risk of a fragmented policy response. National associations of subnational governments are also playing a role to ensure vertical coordination efforts – disseminating information, identifying and sharing solutions, and supporting the implementation of emergency measures by their members. Effective crisis response highlights that robust vertical and coordination mechanisms are more important than ever.

The value of partnerships and communication for crisis management and beyond

No single government, or level of government, can meet the demands of crisis management alone. The COVID-19 crisis, given its scope and magnitude, is challenging all levels of government to reinforce their partnerships – with each other, with the private and third sectors, and with citizens. If priorities are mutually identified and agreed upon, and initiatives are designed with sufficient information exchanged between the developers and implementers, then the likelihood of an effective support programme will be greater. While this certainly requires coordination, it also means a clear delineation, understanding and agreement of roles and responsibilities, and mutual respect, in the short, medium and long term.

Quickly mobilising necessary public, private and third sector actors can help governments respond to a crisis more effectively. Countries are applying this insight in various ways. Asian countries, for example Korea, are drawing on their experience with SARS. In Attica Greece, the regional government is working with the Medical Association of Athens to establish preventive measures against the coronavirus (European Committee of the Regions, 2020[365]). Crisis management plans used in Asia and in the Nordic countries, for example, can help rapidly mobilise diverse actors to meet crisis-induced challenges, such as those arising from this pandemic.

Clear, transparent, rapid, and accurate communication among all parties is fundamental on many levels. First, it helps government and emergency personnel respond in a targeted manner. New Zealand’s COVID‑19 Local Government Response Unit (New Zealand Government, 2020[366]) is an example of such an activity. Second, it can promote knowledge sharing which then leads to the application of more effective solutions. Portugal’s General Directorate of Local Authorities established a contact line to support information exchange and peer learning among municipalities. The Local Government Association in England provides communications templates to help City Councils share good practices and exchange information (Local Government Assocciation, 2020[367]). Third, and perhaps most importantly, it contributes to trust in the institutions and people leading the crisis management effort, which in turn can mitigate the crisis’ negative impact. Effective crisis communications depends on the relationships across all levels of government and with the public and private sectors. It means communicating early, clearly, regularly and with a coherent message. Subnational governments need to know what they are facing and what is expected of them – their role must be clear. Citizens and businesses need to be reassured that the government has a strategy for each stage of the crisis. Like subnational governments, they too need to know what is expected of them, and feel reassured that they are supported through a difficult period (Smith, N., 2020[368]). There is evidence that in the face of COVID-19 people expect government to lead in all areas relevant to the pandemic: containment, information dissemination, economic relief and support, helping people cope, and getting the country back to normal (Edelman, 2020[369]). Less is expected of business, NGOs and media.

One of the most powerful aspects of a partnership is the ability to generate agreed upon objectives, priorities and plans. Taking unilateral decisions can lead to non-compliance with measures at a minimum, and larger-scale demonstrations or conflict at a maximum, as seen in France (Marseille), Italy, Spain, the UK and the US during this crisis. Bringing together a territory’s various levels of government to identify objectives and design measures in collaboration can lead to stronger implementation of containment and recovery efforts. It is also important to ensure sufficient and timely consultation with other stakeholders, including business owners, service providers, teachers and parents, and civil society. This can increase the possibility that measures are followed, despite “virus-fatigue”, and can lead to more locally appropriate, more innovative initiatives. A September 2020 survey on the perception of EU citizens regarding the role of regional and local authorities in managing the COVID-19 crisis, and subnational government influence in EU politics and policies more broadly, indicates that about two-thirds of Europeans think that regional and local authorities have insufficient influence on decisions made at the EU level (EU Committee of the Regions, 2020[189]). Specifically, Europeans would like their regional and local authorities to have more influence on policies related to health (45%), employment and social affairs (43%), and education, training and culture (40%). Furthermore, 58% of surveyed Europeans think that greater influence of regional and local authorities would have a positive impact on the EU’s ability to solve problems (EU Committee of the Regions, 2020[189]), and, implicitly, those associated with the coronavirus.

The importance of trust in all levels of government

In some countries, trust in national government has increased during this crisis. Where it is not, the gap is often filled by increased trust in local government, which tends to be higher even in non-emergency times (Edelman, 2020[369]). Europeans tend to trust regional and local authorities (52%) than the EU (47%) or their national government (43%) (EU Committee of the Regions, 2020[189]). Regional or local authorities are taking, and will continue to take, appropriate measures to overcome the economic and social impact of COVID-19 crisis for 48% of Europeans. Citizen trust in government can help mitigate the impact of “virus-fatigue” that contributes to a more lax uptake of virus control measures (e.g. confinement, social distancing, wearing masks), and jeopardise the success of emergency actions and vaccination campaigns.

Citizen trust in government results in greater compliance with government response measures. Mobility restriction measures are more effective where trust is high. This relationship holds between countries and within countries. In the United States, for example, a given increase in stringency is associated with a bigger decline in mobility where trust is relatively strong and therefore, most likely, in a bigger decline in the spread of the pandemic figure. In Europe, compliance with public health policies is also higher where trust is high (Bargain and Aminjonov, 2020[370]). The effectiveness of restrictions on reducing COVID-19 mortality rates depends on the mediating effect of trust between restriction and mobility/social interactions.

This further highlights the importance of successful multi-level governance. Each level of government depends on the other for different aspects of policy and service design and delivery to manage the impact of COVID-19. At the same time, ensuring policy success will depend heavily on subnational governments and their ability to deliver solutions. Citizen trust can play a role in ensuring compliance with containment measures and mitigate the impact of “virus-fatigue”. In this context, it is important to ensure that subnational governments have appropriate and adequate support from higher levels of government to deliver solutions and maintain citizen trust.

While this crisis may be generating rising levels of trust in government, the challenge for public officials will be to continue building it up and maintain it. All levels of government may want to take stock and evaluate the trust-building actions. While it can take many years to build trust, it can be rapidly lost (Edelman, 2020[369]).

Urban/rural spatial equilibrium and the role of telework

The future of telework may have a significant long-term impact on urban and rural development. The COVID-19 pandemic and its aftermath might contribute to strengthening urban-rural links. Teleworking is a significant factor in a territory’s ability to mitigate the crisis’ economic impact. It has required investment and adaptation (including cultural and behavioural) on the part of employers and employees. While there is some discussion around whether increased possibilities for teleworking will lead people to leave large cities and establish residence in smaller cities or rural areas, the attractiveness of cities has not disappeared; e.g. employment opportunities and access to services and amenities. At the same time, medium-sized cities could see a boom, as well as smaller municipalities adjacent to larger cities. The long-term impact on the urban/rural spatial equilibrium is difficult to predict, though telework, or other more flexible work formats, is likely to remain a permanent feature of work to some degree.

In Iceland, for example, COVID-19 has accentuated the value of a government employment programme to ensure that 10% of all advertised jobs at ministries or their institutions not be associated with a specific location. In other words, place of residence should not influence ministry staff selection or a candidate’s consideration of the job opportunity. Instead, attention is focused on the job in question. If a staff member is appointed whose residence lies outside of daily travelling distance to the hiring ministry or institution, the employer must try to find adequate working facilities that are closer to home. By the end of 2021 5% of all jobs advertised should operate without a set location, to reach 10% by 2024. The success measure is the number of jobs in individual ministries and institutions that are performed off-site compared to 1 January 2018. This initiative is led by the Ministry of Finance and Economic Affairs.

Participation in global value chains and industrial policy

Globalisation has an ambivalent relationship with resilience in the COVID-19 crisis and in the climate challenge (OECD, 2021[371]). The impact of COVID-19 on national, regional and local economies is propelling governments to rethink their industrial policies and production processes and the length of global value chains. Consideration is being given to the opportunities associated with reshoring strategic industries. Doing so in raw materials, for example, could reactivate rural economies as hosts of these industries. Also beneficial to rural economies can be the potential jobs created if the manufacturing sector uses and produces services in addition to goods. Greater emphasis on local production processes can favour shorter lead times and also shorten supply chains, making these more sustainable by reducing carbon emissions – a popular point with consumers.

There are challenges to manage, however, and these can vary according to a region’s industrial drivers. For example, regions with major ports or logistics centres and those with large shares of employment in manufacturing or other tradeable sectors may be more affected by disruptions in global value chains. In addition, reshoring or producing locally can be more costly than offshoring. Production shifts can also be difficult to accomplish if a region lacks the necessary resources or skills as inputs. Meanwhile, regions with a productivity profile reliant on SMEs may be less resilient to disruptions, such as COVID-19, as these enterprises often operate in a limited number of markets and rely on a short list of suppliers and buyers.

Despite these challenges, the COVID-19 crisis can be used as an opportunity to accelerate the reconstruction of productive processes, industries and regions that were latent or growing only moderately. It may also be a good moment to reinforce investment in reorganising production methods in areas that did not exist during previous crises (e.g. 3D-printing and production, e-commence, digital technologies that support easier teleworking, etc.). The COVID-19 crisis could introduce an exponential shift in the circular economy, the relocation of production, short circuits, logistical reorganisation, and the digitalisation of companies, for example (Assemblée des Communautés de France, 2020[372]). Finally, COVID-19 may create space for improved and expanded services, contributing to regional attractiveness in remote and rural areas.

The climate imperative: integrate carbon neutrality targets into recovery plans at all levels

Climate change poses risks to the foundations of human wellbeing, including health, with potential systemic know-on effects. They also vary across regions and cities and, as in the Covid-19 crisis, require a place-based response (OECD, 2021[371]). Regions and cities are ideally placed to create links between COVID‑19 recovery packages and the climate change policies. They are responsible for about 64% for the public investment dedicated to climate and environmental initiatives. Using this power to invest in the green transition and properly target local needs, could further turn the COVID-19 crisis into an opportunity. For example, investing to reduce health risks can reinforce or be reinforced by investing to reduce pollution levels, as health and a clean environment can be positively related and contribute to a community’s resilience. Regions and municipalities should link emergency infrastructure to long-term objectives.

While green priorities are announced by many governments as central in the recovery, there are still significant gaps between rhetoric and the concrete policy measures that are adopted. Postponing bold decisions can have huge costs. In the G20, only 16% of the stimulus going to sectors relevant for cities (energy, transport and waste) is sustainable as measured by the Green Stimulus Index (Coalition for Urban Transitions, 2020[373]), which represents about 1% of total stimulus. The spending allocated to green measures represents about 17% of recovery spending or 2% of total COVID-19-related spending in OECD countries, Costa Rica (accession) and Brazil, China, India, Indonesia and South Africa (OECD, 2021[3]).

Adopting new regional policy instruments and reinforcing multi-level governance systems

New challenges arising from the crisis, and others that pre-dated the crisis, are require territorialised responses. The lack of trust in government, particularly in national governments, is raising democratic challenges and leading to a rise in geographies of discontent. High levels of national level public debt and increased subnational public debt is creating limited fiscal space in the medium-term, beyond the recovery packages. Disparities are being amplified between jurisdictions that have the administrative, fiscal and strategic capacities to attract private funding and those without.

These challenges create opportunities for new regional policy instruments to be adapted and for a reinforcing of multi-level governance systems. Priorities during the recovery include:

• Reinforcing the flexible and adaptable multi-level governance systems required during the emergency to allow for continuing timely responses to territorial situations and differentiated responses to the needs of regions, while supporting good governance during the recovery.

• Strengthening partnership-based approach – with each other, with the private and third sectors, and with citizens – to overcome the new collective challenges.

• Re-evaluate the way responsibilities are assigned and financed, and assess areas for improvement to better manage future shocks.

• Develop risk management strategies at all levels to build more resilient regions into the future

• Identify new sources of financing, from traditional budget sources to external sources of funding and private sector collaboration.