LOCAL PUBLIC FINANCES

2024

Pamphlet 1

Report on the financial situation

and management of local authorities

and their establishments

July 2024

2

Summary

In 2023, a favourable financial situation for the local authorities, but a

more difficult one for the departments and regions

In its report on local government finances in 2023, the Court found that the financial

situation of local authorities and their groupings (public establishments for inter-municipal

cooperation and trade unions) had been particularly favourable in 2022. All local authority

categories had, to varying degrees, seen their situation improve during that year.

As the Court had predicted in the same report, the financial situations of the different

categories of local authority diverged in 2023.

The financial situation of municipalities and inter-municipal structures continued to

improve (+€1.2bn in gross savings

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and +€1.4bn in savings net of loan repayments). On the

other hand, the financial situation deteriorated for the regions (-€0.4bn and -€0.5bn) and for

the departments (-€4.7bn in both cases on a like-for-like basis). The sum of these divergent

trends results in an overall fall in local authority savings (+€3.9bn for gross savings and

- €3.8bn for net savings on a like-for-like basis).

Gross and net savings of local authorities between 2017 and 2023 (€bn)

Source: Court of Auditors, based on DGFiP data

PRF: actual operating revenues; CRF: actual operating expenses.

The differences in the composition of the "revenue baskets" of local authorities explain

these divergent trends.

Revenue growth is slower for the departments and regions, but accelerating for the

local authorities

The growth in operating revenue for local authorities as a whole has slowed

(+3.4 % compared with +5.2 % in 2022 on a like-for-like basis).

As the main recipients of property transfer tax (DMTO), the departments suffered the

consequences of the downturn in the property market in 2023 (€4.5bn in DMTO revenues for

all local authorities combined), after having previously benefited from its sustained momentum.

The downturn in DMTO revenues in 2023 highlights the unsuitability of financing the operating

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Gross savings correspond to the balance of the operating budget. These savings, net of loan repayments,

correspond to the self-financing of capital expenditure.

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expenses of the departments, which are primarily comprised of fixed and inflexible social

spending obligations, by means of a cyclical and volatile tax.

DMTO revenues collected by the departments between 2013 and 2023 (€bn)

Source: Court of Auditors, based on DGFiP data

Following the abolition of the residence tax on primary residences (THRP) in 2021 and

the company value added tax (CVAE) in 2021 (regional share) and 2023 (shares of the

departments, inter-municipal structures and municipalities), VAT, which offsets the

corresponding loss of revenue, has become the main source of revenue for local authorities.

In 2023, it provided the regions with more than half of their real operating revenue (53.4 %),

the departments with more than a quarter (28.7 %) and the inter-municipal structures with

almost a quarter (24.6 %).

In 2022, the VAT revenues collected by local authorities rose sharply (+9.4 %), well

above the nominal growth in national wealth as measured by gross domestic product (GDP).

However, on a like-for-like basis, in 2023 VAT revenue collections rose by less (+1.9 %) than

GDP in value terms.

Under these conditions, the operating revenues of the departments fell (-1.1 % on a

like- for-like basis), while those of the regions showed a limited increase (+2.9 %).

Conversely, the operating revenues of municipalities and inter-municipal structures in

local authorities block rose sharply (+5.8 %). Income from property tax on built real estate

(TFPB) rose sharply as a result of the revaluation of bases (cadastral rental values) in line with

inflation and increases in tax rates by municipalities which, although not more frequent, had a

greater impact on revenues than in 2022. Although the revenue from residence tax on

secondary residences is not comparable to that from residence tax on primary residences,

which has been abolished, it is increasingly leveraged by local authorities through rate

increases and tax surcharges. In addition, the local authorities' revenues from fees and

properties remained buoyant.

Acceleration in operating expenditure

Operating expenditure has accelerated (+6.1 % on a like-for-like basis compared with

+5 % in 2022 on a like-for-like basis), due in particular to the continuing powerful direct and

indirect effects of inflation on expenditure: higher prices for the purchase of goods and services

(in particular water, energy, heating and food); indexation of social benefits to inflation; higher

interest charges on financial debt as a result of rising interest rates; wage increases.

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Real operating expenditure of local authorities, at current scope, between 2017

and 2023 (€bn)

Source: Court of Auditors, based on DGFiP data

Note: the dotted lines show changes in personnel costs and purchasing costs (right-hand scale).

The increase in remuneration costs (+4.7 %) reflects in particular the impact of the

increase in the public service index point (+1.5 point on 1

July 2023, in addition to the effect of

the 3.5 % increase on 1 July 2022 carried forward to 2023) and other salary measures (low

incomes) taken by the State. It also reflects the continuing transformation in the composition

of the workforce (increase in the relative proportion of contract staff and category A staff)

towards higher average remuneration.

Growth in capital expenditure

Despite the fall in their savings, local authorities continued to invest. As a result, their

capital expenditure rose sharply once again (+€4.5bn, or +6.6 %, a level similar to 2022).

Capital expenditure by local authorities between 2017 and 2023 (€bn)

Source: Court of Auditors, based on DGFiP data

The increase in capital expenditure is mainly due to growth in volume (around 60 % over

the two years 2022 and 2023).

Excluding the European funds they manage, the regions maintained their capital

expenditure, while the departments and, even more so, the local authorities increased theirs.

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Fundamentals remain sound, but some situations call for attention

For the most part, the increase in capital expenditure has not been financed by increased

borrowing, while rising interest rates have made borrowing more expensive.

The amount of local authority debt changed little compared with 2022 (almost

€188bn compared with almost €186bn). Local authorities are in control of their debt levels. In

recent years, including 2023, it has fallen in relation to national wealth (to 6.7 % of GDP at the

end of 2023).

The theoretical duration of repayment of financial debt through gross savings has

deteriorated as a result of the fall in gross savings. However, at 4.7 years, this period remains

perfectly sustainable. Specifically, it stands at 4.5 years for the local authorities, 4.2 years for

the departments and 6.1 years for the regions. These levels remain well below the alert

thresholds.

Financial debt (in €bn) and debt-to-income ratio (in years) of local authorities

between 2017 and 2023

Source: Court of Auditors, based on DGFiP data

As the increase in capital expenditure was not covered by debt, it was financed by a

drawdown on working capital, which resulted in a reduction in the surplus balance of the local

authorities' current account at the Treasury (-€4.6 bn). This had risen sharply in recent years.

Despite its decline, it remained at a higher level at the end of 2023 than at the end of 2020.

With debt under control and the current account at the Treasury still high, the overall

financial situation of local authorities in 2023 does not give cause for concern.

However, the balance of the regions' current account at the Treasury is low. At the end

of 2023, five departments had negative net savings (compared with one in 2022). The number

of local authorities with a negative cash position after deducting very short-term cash loans

has increased (at the end of December 2023, 497 municipalities and 54 EPCIs (intermunicipal

authorities for cooperation between local authorities) compared with 426 municipalities and

48 EPCIs one year earlier). A large number of overseas municipalities have unbalanced

budgets and are delaying payments to their suppliers and social security bodies.

The continuing fall in DMTO revenues in 2024, combined with an increase in the volume

of their social spending, will leave around twenty departments particularly vulnerable.

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Local authorities now make a negative contribution to the general

government borrowing requirement

Given the rules governing the balancing of their budgets

2,

local authorities make a

structurally limited contribution to the general government balance.

In national accounts, local authorities had a financing capacity of €3bn in 2022, after

€4.5bn in 2021 (including trade unions). This mainly offset the financing needs of the

miscellaneous local administrative bodies (ODAL, such as

Île-de-France mobilités

and

Société

des grands projets

). Overall, local public administrations (APUL) showed a limited financing

requirement (-€0.9bn in 2021 and -€1.1bn in 2022).

As a result of a stronger rise in operating expenses than in income and an increase in

capital expenditure, local authorities faced a borrowing requirement of €5.5bn in 2023.

Including that of the ODALs, the APUL borrowing requirement rises to €9.9bn, or 0.4 % of

GDP.

For the most part, this negative contribution was forecast in the 2023-2027 public finance

programming act (at 0.3 %). The deterioration in actual outcome compared with forecasts

reflects the acceleration in operating expenditure, which increased by one percentage point in

volume terms, whereas the programming act forecast that it would remain stable in volume

terms, and a greater increase in capital expenditure than anticipated.

Conditions for the participation of local authorities in the recovery

of public finances not yet defined

The public finance programming act for the years 2023 to 2027 stipulates that local

authorities will contribute to the recovery of public finances by reducing their expenditure and

debt in relation to national wealth and by achieving a significant financing surplus in 2026 and

2027.

Within local public administrations, between 2024 and 2027, local authorities and their

groupings are expected to reduce their operating expenditure by 0.5 percentage points per

year in volume terms, excluding expenditure by the departments on individual welfare benefits

and child welfare.

This effort to control operating expenditure should enable local authorities to continue

their investment efforts, particularly in order to meet the needs associated with the ecological

transition, and should enable the APULs to achieve the surplus target set by the programming

act.

However, the trend in operating expenditure and the transition to a financing requirement

for local authorities in 2023 will make it more difficult to achieve the objectives of the

programming act.

This is all the more the case given that, unlike the previous 2018-2022 programming act,

which was applied before the outbreak of the health crisis in 2020, the current programming

act does not include any measures to enable the objectives relating to local government

finances to be achieved.

The ‘Cahors contracts’ mechanism for controlling the growth of operating expenditure,

which was suspended in 2020 because of the crisis, has not been renewed.

In addition, the objective for the evolution of state financial support to local authorities

continues to focus on a narrow scope of financial transfers (revenue levies excluding the

FCTVA and the budgetary mission ‘Relations with local authorities’), representing around

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The operating budget must be balanced without recourse to borrowing. Borrowing is reserved for capital

expenditure, excluding operating expenditure such as the refinancing of maturing loans.