Towards local financial autonomy beyond corporatism
Warning signs of a deep and long-term crisis, the economic challenges of the second half of the 1970s resulted in, both in France and elsewhere, the State being considered as a problem and local authorities as a solution1. Amplified during the “Trente Glorieuses” (30-year post-war boom), this idea has since been discredited. At this time, a process of profound transformation began to take shape, first intellectually then in reality, a metamorphosis of the State. This process sought to assign a key role to the financial autonomy of local authorities, a logical attribute of the constitutional principle of administrative freedom. Through this transformation, a definitive change arose shifting the economic sphere towards the administrative and political sphere in an effort to decentralize how society is organised. This was slated not only as a path to economic renewal but also as the way to address the public financial crisis of the time.
Contrary to this movement, the worsening deficit and public debt has in recent years led to State oversight to be reconsidered as a necessity. This consequently could entail calling into question local financial autonomy, a notion that is no longer subject to a shared definition, even when it still holds a central place in debates on the administrative freedom of local authorities.
In this respect, it should first be stressed that the autonomy of financial management not be confused with the autonomy of financial decision making, in particular fiscal decisions. There is confusion surrounding this subject that tends to assimilate the two notions. Financial transfers from the State (allocations or revenue shared or transferred from State taxes), when they are sufficient and moreover globalised certainly enable choices to be made, in particular as regards management. However they do not offer any real decision-making power, which can only come from at least relative control over the sources of funding in particular taxation, which is the true measure of the degree of independence.
In other words, the question that arises is whether the financial autonomy of local authorities can exist when the freedom to manage the allocated funds is not combined with a certain decision-making power. Clearly this power has been largely diminished in taxation matters at various levels depending on whether it relates to regions, municipalities or departments.
However the problem is even more critical when their management autonomy is restricted. For instance, when allocations attributed by the State are frozen or reduced or even when rules are introduced aimed at limiting the volume of their spending or debt as part of public finance programming bills. This is an objective that has been pursued for over 30 years. The Feuilleley-Raynaud report had already recommended in 1986 to set the reference standards (e.g. growth rate of the State’s civil operating expenditure) for local spending. According to this report, these standards may either be imperative or indicative. However, the latter solution was recommended with a penalty for overruns (in the form of a reduction of the overall allocation for operations or an increase in the event that the authority came in below the standard). The report that was requested by the minister of the Interior at the time, Charles Pasqua, and issued on 10 July 1986 was based on the finding that local spending had increased at a faster rate than that of the State (from 8.10% of GDP in 1973 up to 10.67% in 1983). The finding also highlighted the growing cost of compensations for exemptions and reductions, the charge of which rose from 4.7 billion francs in 1979 to 5 billion in 1985. In the same vein, the Balladur report offered to “define as part of an annual debate in Parliament, an annual objective for the evolution of local public spending” to be used as a simple “indicator”, recent reports from the Court of Auditors (since 2013) as well as the report from the Lambert-Malvy commission (2014) all follow the same direction. A path that materialized through an article in the 2014-2019 public finance programming draft bill that introduced “an objective for the evolution of public spending expressed as a percentage of annual change”. This change was set at 1.2% for 2014, 0.3% for 2015, 1.8% for 2016 and 1.9% for 2017.
The framework was continued as part of the 2018-2022 programming bill that includes an article 10 according to which the change of operating expenditure is unilaterally halted at 1.2%. Furthermore, an annual reduction of the financing need is set at €2.6 billion. Lastly, the same article states that the purpose of the “contracts concluded between the State representative and regions, the regional and local authorities of Corsica, Martinique and Guyana, the departments, the Lyon metropolitan area, as well as municipalities with over 50,000 inhabitants and public institutions for intermunicipal cooperation with specific taxation of over 150,000 inhabitants will be to determine the objectives of changes in operating expenditure and financing needs of the local authority or institution concerned and how to comply with these objectives”. This measure which is set to concern 319 local and regional authorities in 2018 is part of the government’s desire to reduce operating expenditure by €13 billion by 2022 and reduce the use of borrowing.
This situation is reminiscent of that prior to financial decentralisation, before the decentralisation laws of 1982-1983, when local authorities were still subject to prior control, when they did not have subsidies or general loans, in the event that the 1973-1975 tax reform had not taken place nor the possibility instituted by the 1980 law for regional authorities to vote on their primary tax rates.
In contrast to this is all the instruments used to control and steer management, identical to those of a business, now used by properly trained staff. It is important to note that a professionalism has emerged in the management of local authorities that enables a command and control of finances that could not have been imagined 40 years ago. A process of financial accountability effectively began during the 1970s, at a time when it was becoming visible that, faced with the State’s financial crisis, it was not only essential to manage public finances in a more rational manner, but also to go further with the accountability of public actors and firstly local actors. It was then that the preoccupation of improved management began at the local level, to better control the management, in particular by using managerial practices borrowed from the business sector (financial analysis, cash flow statements, financial year accounting, debt control, multi-year investment planning). A number of local and regional authorities have become think tanks for public management ideas. This idea of accountability rooted in management is now found to the same extent in the financial reform process undertaken for the central State with the LOLF bill. This approach effectively forms the foundation of the new public financial governance. The modernization process is consequently broad and continuous. It spans over the long term and concerns local authorities, the State and social security.
Everyone is now aware that public finance must be sustainable and that it is necessary to adopt an integrated design of public finance and to draw practical conclusions. Consequently it is essential to introduce frameworks for the consistency of the public financial system enabling a shared logic to be set forth for the evolution of spending and revenues. In other words, the autonomy of local financial decision-making and management can no longer be considered as integrated within general public financial governance, without however calling into question the principle of the administrative freedom of regional authorities.
In this context and if we accept the idea that the local sector remains fundamental for economic development, it would accordingly be irresponsible to disregard the implementation of a system providing consistency of financial decisions made by various local authorities, by the State and by social security organizations. The public financial system must be consistent: it is a crucial condition to ensure that the diversity and complexity of the system does not evolve towards disorder, chaos and implosion.
The underlying issue is therefore to organise and assume the steering of a complex system as well as to avoid its uncontrolled development. To do so, it is important to admit that we cannot conceive of local and national institutions on an isolated basis, which does not involve confusing their functions. It involves identifying the actors, situating them in the network that is necessarily multi-rational to which they belong and succeeding in creating a public financial governance network. A joint body must be created to regulate, through consultation, the changes in resources and public spending, adjustments to apply, in time and space. This steering approach based on a partnership model and systemic control is imperative.
The National conference of public finance2, launched in 2006, advocated this approach but has proven to be too limited to regulate the public financial system, as it exclusively covers spending. However, it is important to encourage initiatives that facilitate another way of conducting public financial policies. The law of 27 January 2014 on the modernisation of territorial public action and metropolitan affirmation (Law no. 2014-58) that created a Territorial conference of public action in each region follows this path such as the National conference of territories aimed creating a dialogue between the State and local authorities which was launched by the president of the Republic on 17 July 2017. The purpose of this body is to implement a “confidence pact” between the local powers and the State.
It is important to rethink public management in general and that of local finance in particular necessarily within a general context of overhauling the decision process, as well as general streamlining and shared control of public spending and revenues between the actors concerned. Along with this imperative comes a second, that of being able to build a global system, not centralized but integrated, that is to say one that respects the singularity and autonomy of each public actor.
This path has not yet been established through an institutional framework. We remain stuck in the ways of thinking and a context that no longer exists, that of the second half of the 20th century or rather with all kinds of corporatism: territorial, political or functional.
1. This complete shift of paradigm was perfectly illustrated by Ronald Reagan’s speech during his inauguration as president of the United States on 20 January 1981: “In this present crisis, government is not the solution to our problem. Government is the problem”.
2. On CNFP, see M. Bouvier et al., Public Finance [Finances publiques], op. cit. See our editorial, RFFP Nov. 2005, 88: “The annual public finance conference: towards a new financial decision process” [La Conférence annuelle des finances publiques : vers un nouveau processus de décision financière]; also RFFP, Sep. 2006, 95: “Local authorities: instigators and partners of a new public financial governance” [Les collectivités locales : initiatrices et partenaires d’une nouvelle gouvernance financière publique]; as well as the editorial, RFFP Feb. 2006, 93: “The jolt by breaking down the barriers of national, local and social public finance” [Le sursaut par le décloisonnement des finances publiques nationales, locales et sociale]. See infra, chapter 6.