The Extent and Impact of Local Fiscal Stress
| Author | George Boyne |
| Published date | 01 January 1988 |
| Date | 01 January 1988 |
| DOI | http://doi.org/10.1177/095207678800300110 |
| Subject Matter | Articles |
The Extent and Impact of Local Fiscal Stress
George Boyne, Polytechnic of Wales
Abstract
This paper analyses fiscal stress in local authorities in England and Wales since
1981. Part I identifies the extent of fiscal stress and shows that in many local
authorities it has been high. Part II analyses the consequences of fiscal stress for
social and economic conditions in local areas. The empirical analysis shows that
fiscal stress tends to be more severe in areas which are already deprived. Such areas
may therefore be prone toa ’fiscal stress syndrome’in which community deprivation
and budgetary stress produce a mutually reinforcing spiral of local decline. The
prospects for policies which might alleviate fiscal stress are evaluated.
Introduction
Since the early 1970’s local governments in the USA and Western Europe have been
widely diagnosed as suffering from ’fiscal stress’ (see Clark and Ferguson, 1983;
Goldsmith and Villadsen, 1986). The major symptom of this affliction is that
revenues fail to keep pace with expenditures. Thus to balance the books local
governments must either raise taxes or cut spending. Until the last few years British
local authorities were considered to be comparatively comfortable. At the start of
the 1980’s one major study stated that &dquo;the current state of affairs cannot reason-
ably be described as critical - local authorities are able to meet their monthly
commitments and there is, at the moment, little danger of staff being made
redundant or draconian cuts in services&dquo;, (Newton, 1981, 195). Similarly it was
concluded that &dquo;the concept of urban fiscal crisis ... does not apply very directly
to England and Wales&dquo; (Bennett, 1982, 190). It appears that such views now
require reappraisal. Cries of fiscal distress are widespread, Liverpool has reached
the verge of mass redundancies (Parkinson, 1985) and eight inner London boroughs
are threatened by impending expenditure cuts of 30% (Audit Commission, 1987).
However, despite such well publicised examples of apparent financial problems,
for local government as a whole little is known about how much stress there is or
what difference it makes. The aim of this paper is to provide evidence on these
questions. If policies are to respond effectively to fiscal stress it is necessary to
15
estimate its severity on a basis which allows a systematic comparison between
authorities.
Councils’ own judgements cannot provide estimates of fiscal stress
which are consistent across authorities because of the inherently ideological nature
of perceptions of service needs. For example, in similar financial circumstances
Labour authorities are likely to believe they are under greater stress than Con-
servative authorities.
Part I of the paper deals with problems concerning the definition and measure-
ment of fiscal stress and then estimates the extent of stress suffered by seven groups
of English and Welsh local authorities since 1981. Part II analyses the impact of
fiscal stress, specifically examining whether its spatial distribution has worsened
the imbalance between prosperous and deprived areas.
I. THE EXTENT OF FISCAL STRESS
(a) Defining Fiscal Stress
To estimate the extent of local financial problems it is necessary to provide an
operational definition of fiscal stress which permits a comparison between author-
ities and over time. In one sense there is never any fiscal stress - revenues must
keep pace with expenditures because local authorities are under a statutory obli-
gation to produce a balanced budget. The ’creative accountancy’ measure adopted
by some councils in recent years have blurred the boundaries of the budget
(Parkinson, 1986), but a formal requirement to equate income with spending
remains. In another sense there is always fiscal stress - no local authority has
enough funds to fulfil all its ambitions for service provision. Thus a criterion of
fiscal stress is required other than councils’ actual budget decisions or perceptions
of local circumstances.
A general definition of fiscal stress which can be applied to local authority
budgets is:
&dquo;a situation in which a governmental unit ... must, even after accounting for
any increase in tax revenues due to an expanding tax base, choose between (1)
taking action to increase revenue in order to maintain existing real expenditure
and service levels (2) reducing real expenditures and services (3) engaging in
some combination of these activities&dquo; (Wolman and Peterson, 1981, 773).
Using this definition fiscal stress occurs when the extra expenditure required for
a constant level of service is not covered by the ’secular’ increase in revenue from
changes in the value of the local tax base and central grants. The term ’real
expenditure and service levels’ in the above definition is interpreted in this analysis
as net rather than gross spending. Net expenditure covers the cost of the parts of
local services which are free at the point of use. Central government has recently
argued that more use of charges should be made in the provision of local services
(Department of Environment, 1986). If income from fees and charges was
increased then the level of gross expenditure could be maintained at a lower net
cost.
However this would represent a reduction in the benefits received by the
users of services. Further, it may be argued that greater use of charges is inappro-
priate because much local expenditure consists either of public goods (e.g. police
16
and fire services) or of services which are intentionally re-distributive °(e.g. housing
and the personal social services).
(b) Measuring Fiscal Stress
It follows from Wolman and Peterson’s definition that fiscal stress can be measured
by the size of the revenue shortfall as a proportion of the expenditure required to
maintain real service levels. This is equivalent to the percentage cut in real expendi-
ture which would be necessary for a balanced budget given the constraints of cost
and revenue changes. While this measure provides a quantitative estimate of the
extent of stress a further qualitative criterion is required to evaluate its severity.
Wolman and Peterson’s definition simply indicates that fiscal stress becomes more
severe as the revenue gap increases. To obtain a more precise criterion of the
severity of stress it is necessary to answer two questions. First, what percentage cut
in real expenditure represents severe fiscal stress - 5%, 25% or 50%? Second,
should the severity of stress be evaluated on an annual basis or on a cumulative
basis over several years?
The extensive literature on fiscal stress offers little guidance on the first of these
questions. However, rather than...
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