In particular, cities face an extremely difficult situation at four levels, as explained in more details in the paragraphs below.

1. The first major consequence of the Great Recession is its impact on the revenue of local governments around the world. Municipal revenues—either generated by local governments or derived from State transfers— decreased because of the economic slowdown, as did the fiscal value of real property. Some municipal governments also lost major assets that they invested in risk funds and banks that collapsed during the crisis (United Cities and Local Governments 2009). Cities like London, Frankfurt or New York, whose economies were dependent on financial markets, were badly hit by the decline in tax revenue and the surge in unemployment in the financial sector.

2. Expenditures—especially spending to address social needs—also rose because of the slowdown in economic activity and the corresponding increases in unemployment and social welfare needs. The decline in revenue and increase in expenditure lead many cities to experience the worst “fiscal crunch” in decades (Perlo 2011).

3. Financing capacities shrank owing to the difficulty in obtaining loans and the increase in the cost of money. Banks and bond issuers—the main financiers of cities—have been heavily impacted by the Great Recession. All major rating agencies viewed the impact of the economic downturn on the credit qualities of municipalities as significant because of declines in the tax base, expenditure pressures or rigidities, and increasing and more expensive debt. From October 2008 to January 2010, Moody’s rating actions affected 72 subnational governments, or 24 percent of the rated universe, outside the United States (Canuto & Liu 2010). Foreign investment to finance infrastructure has declined; operations underway have been put on hold in many instances and many projects have either been cancelled or delayed (Paulais 2009).

# **Impact on Municipal Revenue**

The economic downturn has led to a decline in own revenues in cities around the globe. Municipal associations of European countries indicate that 61% of respondents have experienced a drop in own revenues (more exactly 61% for taxes and 42% for fees). In the USA, a survey of local governments shows an expected drop in revenues of 0.4% in 2009. Developing and transition countries—for example, Belarus, Burundi, Uganda, and Ukraine—expect decreases in their own revenues.

Although own revenue decreases result from reduced economic activity and tax bases, other crisis impacts can affect revenues as well. Some countries also expect decreases from tax evasion and general difficulties with tax compliance (e.g., Australia, Ghana, New Zealand and Uganda). In some countries (e.g., Benin, Mali and Niger) the lack of overall liquidity due to a drop in (national and local) revenue has resulted in the treasury system of these countries giving priority to national expenditures and the diversion of local revenues (cash) to finance them (United Cities and Governments 2009). Revenue declines from shared taxes are another source of fiscal stress. European municipal associations, for example, indicate that 36% of respondents have experienced a drop in revenues from shared taxes. Significant reductions in revenue sharing from natural resources are reported by Bolivia (20 %) and Peru (30 %).

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