Global: Municipal Finance

Introduction:

The objective of this Guide to Municipal Finance is to introduce government officials, policy makers, professional practitioners, civil society, and academics in UN member states to the current issues in municipal finance in countries around the world. The Guide emphasizes the important role that municipal finance plays in local service delivery, particularly in the context of globalization, decentralization, and a focus on sustainable development.

Interest in cities around the world is on the rise, in large part, because more and more people are living in cities in both developed and less developed countries. The rapid increase in the urban population has put pressure on local governments to provide a range of services from water and sewer infrastructure to social services and housing. To meet the rising demands of urbanization, municipalities need adequate revenue tools to pay for services and infrastructure.

Definition Of Municipal Finance:

Municipal finance is about the revenue and expenditure decisions of municipal governments. It covers the sources of revenue that are used by municipal governments – taxes (property, income, sales, excise taxes), user fees, and intergovernmental transfers. It includes ways of financing infrastructure through the use of operating revenues and borrowing as well as charges on developers and public-private partnerships. Municipal finance also addresses issues around expenditures at the local level and the accountability for expenditure and revenue decisions, including the municipal budgetary process and financial management.

Municipal Finance Issues, Challenges, and Trends:

Local governments make expenditures on a variety of services including transportation, policing, fire protection, water and sewers, garbage collection and disposal, housing, health, recreation and culture, education, and social expenditures. They fund these services and the infrastructure associated with them from a variety of sources. This chapter looks at the state of municipal finances in selected countries and identifies issues, challenges, and trends.

State Of Municipal finance:

Comparative statistics on local government expenditures and revenues around the world are difficult to find. Tables 1 to 4 provide some information for selected countries from the IMF Government Finance Statistics, which is the only source that provides a breakdown of local government finance information for both developed and less developed countries. The countries in these tables were chosen from the countries in the IMF statistics because they were the only ones for which information was available on a disaggregated basis for local government expenditures and revenues.

Issues And Challenges:

The challenge for local governments is to keep cities economically viable by delivering a high level of services and, at the same time, keeping taxes sufficiently low so as not to discourage individuals and businesses from locating in their jurisdiction. Over the past two decades, local governments have faced a number of issues and challenges that have put stress on their ability to meet this objective.

Rapid Urbanization:

The urban population has been increasing rapidly and is expected to continue to do so over the next 40 years. The urban population in the more developed regions of the world is projected to reach 1.07 billion (or 86 percent of the total population) in 2050; the urban population in less developed regions is projected to increase to 5.3 billion people (or 67 percent of the total population) in 2050. Overall, the urban population is expected to be 70 percent of the world population in 2050.

Challenges for Large Metropolitan Areas:

Not only is the world experiencing rapid urbanization but the number of mega-cities (cities with more than 10 million people) is also on the rise. Whereas in 1950, there were only two mega-cities (New York and Tokyo), there were 20 mega-cities in 2005 and the number is projected to increase to 22 by 2015. Developing countries will have 17 of the 22 mega-cities in 2015.

Globalization:

Globalization is another challenge facing municipalities. To be globally competitive, cities need to provide the supportive infrastructure to attract business and they need to provide a wide range of services: transportation, water, sewers, garbage collection and disposal, police and fire protection, parks, recreation and culture, affordable housing, and social assistance. Cities must also provide services to attract and retain highly trained human capital.

Recent Trends In Municipal finance:

Recent trends in municipal finance result, in part, from the need to find ways to pay for the expenditures which local governments have to make to meet local demands for services and infrastructure. In many cases, these trends relate to the financing of capital expenditures. There are also some new trends in financial management to address the demands for accountability and transparency at the local level.

Role Of Local Government In The Economy:

In terms of economic theory, the major role assigned to local governments is to provide goods and services within a particular geographic area to residents who are willing to pay for them. Local governments should not do stabilization policy because they do not have access to monetary policy tools and because capital and labour flow freely across local jurisdictions.

Major Functions Of Municipal Governments:

The functions of municipal governments differ among countries around the world but generally include transportation services (including roads and transit), environmental services (including water, sewerage, and solid waste collection and disposal), protection (including policing and fire protection), recreation and culture, planning and development, economic development, social services, housing, and health.

Conclusion:

Interest in cities is increasing around the world, in part, because more people are living in cities than ever before and, in part, because recent trends towards fiscal decentralization and globalization have highlighted the importance of cities. Fiscal decentralization has resulted in the devolution of powers and responsibilities from central and state/provincial governments to the local level making local governments responsible for a wide range of services and infrastructure.

Globalization has meant that it is cities that are competing on the international stage. They not only have to provide the services and infrastructure needed to attract businesses and skilled workers but they have to maintain relatively low taxes on businesses so that they do not adversely affect their competitive position. In short, cities are critical to the success of the new economy.

Also Read: A Case of Sustainable Low-Cost Housing Projects in Kenya