Fitch Ratings says the outlook for local and regional governments (LRGs) in France remains challenging for 2012.
The agency expects the negative trends of 2011 to continue in 2012. The regions and departments are especially hard hit by the abolition of business tax in 2010, which has reduced their revenue flexibility, while social and countercyclical spending has soared and the frail economy is likely to result in weaker fiscal performance.
Fitch expects budgetary performance will be constrained in 2012 and borrowing needs will be continue to be sizeable.
Even if local spending stabilises due to the termination of transfers of responsibilities, 2012 will be a turning point for LRGs, as the replacement of business tax by a basket of non-dynamic revenues takes full effect.
Local authorities are preparing their budgets based on slower growth of resources and controlled operating spending. Also, within the central government’s commitment to reduce the general government deficit, partly through austerity measures, local authorities are further compelled to reduce public spending. Thus, state transfers will stagnate next year and in 2013.
Most of the LRGs’ operating expenditure offers no significant elasticity. Decentralisation has increased rigid costs, while economic recession means that expenditure such as vocational training and social assistance can hardly be reduced. Pressure on LRGs’ capital expenditure – especially for regions – is likely to remain strong, particularly in transportation.
For details see 2012 Outlook: French Local and Regional Government