Investment Spending of Local Entities

Alice Valdesalici, Eurac Research

Relevance of the Practice

Investment spending of local entities has been severely affected by the economic crisis and the solutions the center has adopted to cope with it. The large reduction of transfers, together with the additional obligations introduced through the Internal Stability Pact (requiring substantial surpluses in the budget of local entities), have added a heavy burden to local finance. As a result, municipalities are the entities that contribute the most to reduce the level of indebtedness. Nevertheless, this goes mainly to the detriment of investment spending. With minor exceptions (mostly in the northern part of the country), the data of the period 2010-2018 show a significant decrease (- 38 per cent).[1]

Among the flexibility measures introduced to favor a turnaround, it is worth to mention the infra-regional agreements and the national solidarity pacts. Together with the principle of balanced budget, these instruments have been introduced as of 2016 in order to assign extra-financial room to certain entities and foster investment spending within the territories.

Description of the Practice

As to the infra-regional agreements, each region can come to term with the local entities located within its territory in order to assign extra financial room to some of them. This is done by ‘borrowing’ financial space from those entities that do not spend/need the entire amount of resources at their disposal, as the principle of balanced budget applies to the entire regional territory, the region included. This is mandated in order to ensure the balance of the budget on a regional scale. Anyhow, each entity has to ensure the recovery of the deficit within the following three years. The same compensatory function is exercised by the national solidarity pacts in case there is no room for maneuver on a regional basis. These pacts permit the activation of compensatory measures at the national level, potentially releasing space to local entities for investment spending. In this respect, Article 10, Law no 243/2012 – as later modified, and implemented by governmental decree (Decree of the Presidents of the Council of Ministers no 21 of 21 February 2017) – stipulates that investments made through debt or the use of surpluses of the previous years are subordinated to an agreement to be reached at the regional level. The agreement serves the purpose of ensuring the respect of the balanced budget rule taking into account all entities within the territory of reference, including the region itself. If no room is left on a regional base, the ‘horizontal’ national solidarity pact redistributes the existing financial spaces respectively among regions, municipalities and provinces/metropolitan cities on a national base.

To be noted is that both instruments represent a tool of last resort. They integrate the already existing margin of maneuver each entity is vested with and can be activated only if the single entity cannot cover its investment spending either incurring debts (in the respect of the limitation applied to the single entity), or using its surplus. To be noted is the fact that surpluses shall primarily be used to extinguish the existing debts; later, they can be earmarked for investment spending (Article 9(3)). Both instruments have a horizontal nature that is to allow extra-flexibility to certain entities, to the detriment of other entities, measured on regional or on a national base. Furthermore, it is worth stressing that the extra resources are available under conditionality. As a matter of fact, they are earmarked and can be used only for the purposes defined by the law. In addition, the related use of ‘free-space’ is limited to the current financial year.

In addition to that, ‘vertical’ national solidarity pacts are also foreseen (Law no 232/2016). These are meant to favor investment spending of both regions and local entities, in case there are no financial spaces available by means of the other two ‘horizontal’ instruments. The vertical nature is linked to the fact that the resources to cover the extra-financial margin of action come from the state budget. Back in 2017 the resources available for local entities were 700 million Euro a year. As of 2018 the amount has been expanded to 900 million Euro a year with a quota reserved to school and sport infrastructures.

Assessment of the Practice

As some scholars highlight, any assessment must be taken with a grain of salt if it does not include a comprehensive ex-post qualitative and quantitative data analysis and that is something lacking so far in the case of investment spending in Trentino and other Italian territories. This is because very small details can make a difference whether a practice can be regarded as effective, at least from the perspective of political economy. Generally speaking, although instruments regarding local investment spending have been in place for three years now and the available data shows an ongoing exchange in terms of financial spaces among local entities, within and beyond the single region, so far investment spending has not registered the desired turnabout. Having a look at the available data, in fact, investments remain on average well below the level of 2010 (-36 per cent). Nevertheless, having a closer look at the data of the last two years (2017-2018), these show an interesting positive trend (+9 per cent), even if with great variations between the northern (+13 per cent) and the southern (+9 per cent) part of the country, with 0 per cent registered for central Italy and +7 per cent for the two main Islands. Discrepancies can also be found between ordinary regions (+9 per cent) and special regions (+13 per cent). Despite these potentially positive trends, this can only be considered as a preliminary assessment of the role played by the mechanisms concerning local investment spending and only the coming years will show whether it is confirmed or not. However, the context of a recession has certainly further exacerbated the problem of a lack of financial space and flexibility for investments. As one observer has pointed out, fiscal consolidation in Italy typically means cutting investments and while such consolidation used to be cyclical in nature, recession made it a structural issue.[2]

Once the above-mentioned turnabout concerning local investment spending is achieved, it will be key to look not only at one-time investment but also on the long-term expenses that they require.[3] Some Emilia-Romagna municipalities after the 2012 earthquake are cases in point for a lack of such a link. They used easily available resources to invest not only in the rebuilding of destroyed infrastructure but also in facilities such as public swimming-pools. The current expenses that the operation of these facilities require were not always duly considered. Thus, the nexus between investments and long-term costs, which is key for financial sustainability, has sometimes received insufficient attention in the past and that will have to be avoided in the future.

References to Scientific and Non-Scientific Publications

Ragioneria Generale dello Stato, ‘Pareggio di bilancio – Patto di solidarietà nazionale “orizzontale”’ (Ministry of Economy and Finance, 26 July 2018)            <>

Sciancalepore C, ‘Le intese regionali nella regola fiscale del pareggio di bilancio: esperienze e prospettive future’ (IRPET and Osservatorio regionale sul federalismo fiscale 2017)

[1] All data in the text are taken from: IFEL Dipartimento Finanza Locale, ‘La finanza comunale in sintesi. Rapporto 2019’ (IFEL 2019)      <>.

[2] Interview with Giorgio Brosio, Professor, Department of Economics and Statistics, University of Turin (17 May 2021).

[3] Interview with Emanuele Padovani, Associate Professor, Department of Management, University of Bologna (7 May 2021).