By contrast, transfers from central government—often a vital component of municipal revenues—have had mixed outcomes following the crisis. While local governments in some nations have experienced a drop in transfers, others have seen a higher flow of capital as central governments take measures to combat declining economic output. European municipal associations illustrate these mixed outcomes, with a slight majority of 55% of respondents to an URBACT study indicating lower intergovernmental transfers from the national budget. The case of Flanders, Belgium demonstrates that real cuts in transfers also may take place in other forms. There, nominal transfers for police services have increased but they finance a lower share of costs than previously because of the rate of growth of wage costs. On the other hand, transfers to municipalities in several countries (Australia, Canada, Denmark, Finland, Norway, Spain, the USA, Colombia, Chile, Brazil, Mexico, etc), have increased to compensate for lower own tax revenues or additional resources have been made available as part of economic stimulus packages.

Finally, many governments lost streams of revenue derived from capital holdings and other assets. For example, Belgian municipalities experienced major losses from the bankruptcy of Dexia bank, in which they owned shares (because Dexia was originally a bank providing governments and local public finance operators with banking and other financial services). Local governments in a number of other European countries, including Iceland, the UK and the Netherlands, lost substantial assets deposited in banks that failed during the crisis.

# **Impact on Municipal Expenditures**

Municipalities in many countries have been forced to reduce current expenditures not only for maintenance and operation but also for some categories that have been relatively unaffected in past crises, such as public sector employment and social services. Making matters worse, these cutbacks are of course not without social and political repercussions. For example, Argentine President Cristina Fernandez has recently made severe cuts to Buenos Aires’ budget, impacting spending on everything from public transportation to hospitals to the electricity system. As a result, public workers went on strike in August, and debates between city officials and dissatisfied labor unions are continuing (The Economist, August 18, 2012).

Other cities have reacted differently during the crisis. Several recent reports<sup>7</sup> show that cities around the world are competitng against each other to attract talent and money.<sup>8</sup> This is why several countries reported increases in municipal expenditures in the midst of the Great Recession. These expenditures finance investments that are expected to help improve the local economic development climate. How local governments have been able to manage these increases is not always clear, except in the countries in which local governments have benefitted from increases in transfers or national fiscal stimulus packages, or where local governments can borrow relatively freely (see below). Presumably local governments can increase priority spending on social programs by reducing other expenditures.

Capital spending outcomes on the other hand, as with government transfers, have been mixed since the start of the crisis. In fact, these two outcomes are often fundamentally related. A

> 7For example Dobbs, Remes, Manyika, Roxburgh, Smit, & Schaer, June 2012 and Schwab & Sala-i-Martin, 2011.

> 8  See also the useful report by Greg Clark (2011) at www.TheBusinessOfCities.com

9