The financial sustainability of local authorities in England and Spain: a comparative empirical study

Abstract

In recent years, the financial sustainability of local authorities has been recognised as a concept of crucial importance in ensuring that public services may continue to be delivered to future generations. Although many European countries have implemented programmes to enhance their financial sustainability, local authorities are characterised by differing administrative traditions and achieve diverse outcomes in response to the reforms made. Taking a comparative approach, the present study identifies institutional, macroeconomic and microeconomic factors that might influence local authorities’ financial sustainability in England and Spain in order to determine and explain similarities and differences in the drivers and risk factors for financial sustainability in local authorities’ provision of public services. Points for practitioners This article is based on three major theories (agency theory, neo-institutional theory and stakeholder theory) related to the institutional, macroeconomic and microeconomic factors determining financial sustainability and aims to identify these factors comparing different contexts (English and Spanish contexts). This identification of factors that influence municipal financial sustainability could clarify what policymakers might have done to prevent the crisis, what they should do to prevent similar failures in the future and how the long-term provision of public services may be ensured.

The Influence of Socio-Demographic Factors on Financial Sustainability of Public Services: A Comparative Analysis in Regional Governments and Local Governments

“…On the one hand, large governments tend to achieve higher financial sustainability due to greater economies of scale and scope [26]. However, population growth could increase the demand for public services and resources [17,37,38]. This fact involves higher expenditures but it does not always involve higher tax collection since an increase in public revenues does not depend only on the population growth, but also on the financial capacity of the population and of the economic activity.…”

“…This fact involves higher expenditures but it does not always involve higher tax collection since an increase in public revenues does not depend only on the population growth, but also on the financial capacity of the population and of the economic activity. In fact, prior research has demonstrated that an increase in the population size could affect negatively on the financial sustainability of local governments in different countries [17]. As a result, the population size can have a negative effect on public spending [46] and on public debt [45], since an increase in the population brings an increase in the demand for resources and services [37].…”

“…In this context, International Organizations (EU, IMF, IFAC, CICA, NAO) and citizens have increased the demand for higher-quality public sector financial information, as premises of the Stakeholders Theory explain. The pressure on all levels of governments has increased to monitor public finances with the aim at reaching the major challenge of re-establishing the sustainable equilibrium between income and expenditures [9,[17][18][19][20], making sense the Stakeholders and Institutional Theory.…”

“…Prior research has centred on the financial sustainability in local governments (LGs) leaving aside the study of this concept in other levels of governments, such as regional governments (RGs), although its findings raised the need to compare the financial sustainability in different governmental levels [10,17,24,26]. So, analysing the behaviour of each potential financial sustainability factor taking into account the different governmental levels (LGs and RGs) has become interesting to understand the financial position of a whole country, because the political decisions to be adopted could be different at each level.…”

“…Therefore, a comparative analysis about the financial sustainability and its factors in the different levels of governments such as LGs and RGs could help to understand the financial situation of a country and to know how each level of government should face the different challenges to achieve the financial sustainability. However, up until now, previous research has not performed this comparative analysis, studying only the influential financial sustainability factors in LGs [17,20,26].…”