Sustainability of Local Public Finance and Regional Development: Challenges and Opportunities in Times of Crisis in Ukraine

Abstract

The socio-economic crisis in Ukraine, which has worsened over the past decade, has had a profound impact on all local communities. Local governments implementing decentralised mechanisms and anti-crisis financial measures are currently facing numerous theoretical and procedural constraints, which, although not homogeneous, have a cumulative effect. In the context of low economic potential and existing legislative constraints, local governments cannot actively manipulate consistent sources of local budget revenues (taxes) to support sustainable regional development, and therefore a coherent policy of credit and fiscal equalisation is an important aspect of ensuring the sustainability of local public finances. The purpose of the paper is to assess the correspondence between the fiscal sustainability of local budgets (with a focus on the borrowing component) and the economic sustainability of regions. Empirical studies of Ukraine's experience based on regression modelling have not found a clear direct link between the drivers of fiscal sustainability of local budgets (solvency, dependence on intergovernmental grants, stability of tax revenues) and the sustainability of socio-economic development of Ukrainian regions. In addition, in the context of the crisis and external shocks, strict adherence to the criteria of fiscal balance of local budgets undermines the ability to ensure a sustainable recovery of the regional economy, so it is important not to limit the fiscal capacity of communities by attracting local borrowings and intergovernmental grant during the crisis.