In 2018, SNG debt remains moderate. However, in the context of the COVID-19 crisis, a significant debt increase is expected in some countries where SNGs will likely apply a countercyclical fiscal policy and support public investment.
Following the 2008 financial and economic crisis, SNG budget balance has been deteriorating in most OECD countries and debt has been increasing. However, the situation has improved over the last years in many OECD countries.
The subnational deficit reached -0.6% of GDP on average in OECD countries in 2018. Overall, subnational government debt corresponded to 28.5% of GDP and amounted to 23.2% of total public debt in 2018. SNG outstanding debt is very unevenly distributed among OECD countries. Overall, SNG debt corresponds to around 38% of GDP and amounts to 31% of public debt on average in federal countries, compared to 14.2% of GDP and around 11% of public debt in unitary countries, where local governments are subject to stricter fiscal and borrowing rules (Figure 5.9).
Canada stands out for its high level of subnational debt, which accounts for around 60% of total public debt, corresponding to 35% of national GDP. It is followed by the United States, where the debt of the states and local governments was equivalent to 41% of GDP and 30% of total public debt in 2018. On the other hand, Austria has a low level of SNG debt compared to other federal countries, corresponding to 12.8% of GDP and 12.6% of public debt.
On the opposite end, SNG debt is particularly low in unitary countries such as Greece, Hungary, Ireland, Israel, the Slovak Republic, Slovenia and Turkey, both in terms of GDP and weight in total public debt. Subnational debt relative to GDP was lowest in Greece, Hungary, Ireland and Israel. Japan stands out as a unitary country with a high level of SNG debt as a percentage of GDP (34%).
In federal countries, the share of state government debt tends to be significantly higher than that of local governments (Figure 5.10), as these countries are not subject to the “golden rule”. Such a rule reserves the right to borrow for the long-term only to finance investment in infrastructures and large facilities. In addition, local government borrowing is generally constrained by strict prudential rules on debt stock and service defined by central or state governments. This limits the level of local government indebtedness in most OECD countries, with some exceptions such as Iceland, Japan, Norway or Sweden.
The level of subnational debt is expected to increase further in 2020, as the COVID-19 crisis is putting pressure on subnational government finances through higher expenditure and reduced revenues. While the COVID-19 crisis has already put short-term pressure on health and social expenditures and SNG revenues (tax revenues, tariffs and fees), strongest impacts are expected in the medium term.
