The Local Recovery Plan to Overcome the Effects of Covid-19

Ester Marco Peñas (coord), Félix D. Laguna Martínez, César Martínez Sánchez, Félix Vega Borrego, Diego Marín-Barnuevo Fabo, Francisco Velasco Caballero Instituto de Derecho Local, Universidad Autónoma de Madrid

Relevance of the Practice

The outbreak of Covid-19 has significantly affected all aspects of life across Europe, impacting differently in urban and rural areas. In addition to threatening our health, the pandemic is also posing serious challenges to our socio-economic systems.

In rural areas, farmers, businesses, and communities have been affected, although probably not at the same level as in urban areas. As part of the ‘Coronavirus response investment initiative plus’ (CRII+), the European Commission announced a new set of measures specifically addressed to support farmers and rural areas, by allowing further flexibility in the use of Structural Funds and the European Agricultural Fund for Rural Development (EAFRD) and extending the deadline for Common Agricultural Policy (CAP) payment applications. The Covid-19 crisis has made us all more aware of the importance of food security and the need to help and to stand-by our farmers, who experience a very severe crisis, which in some cases threatens the survival of their business. In terms of local governments´ financing, the loss of income in rural municipalities could be not too high, due to their lower relative dependence on taxes linked to economic activity and personal income. But, on the other hand, expenditure on social services could have increased dramatically, due to the greater elderly and dependent population.

In general terms, urban municipalities have been harder hit by Covid-19. The epidemic has led to increased expenditure on prevention and health surveillance. At the same time, urban municipalities have suffered a drastic reduction in the income generated by fees charged to users of public transit. Moreover, local taxes linked to the real estate business has also been significantly reduced.

In view of the different incidence of Covid-19 in urban and rural municipalities, the ‘The Local Recovery Plan’, proposed by the Spanish Federation of Municipalities and Provinces (FEMP), must pay different attention to the different types of municipalities and, at the same time, not exacerbate the financial differences between urban and rural municipalities. This plan should fulfill a dual simultaneous function: rebalancing local finances of all municipalities, insofar as all of them have been affected by the Covid-19 crisis and creating new opportunities to make rural areas more attractive places to live and work. In this framework, we intend to assess whether the proposed ‘Local Recovery Plan’ may rebalance the growing economic and financial gap between rural and urban areas.

We endeavor to analyze the following guiding questions of report section 3 (local finances):

  • Are there any special provisions on rural local government financing (e.g., special funds aimed at revitalizing the rural economy and contributing to socio-economic sectors)?
  • How do financial arrangements cope with the challenge of increasingly depopulated rural local governments (RLGs) experiencing a decrease in taxpayers (through an exodus of young and working people) and an increase in service receivers?
  • To what extent does the proposed ‘Local Recovery Plan’ deal with specific urban expenses such as public transport?

Description of the Practice

The proposal of the Local Recovery Plan is built on two pillars. The First Pillar deals with the use of the current savings of local entities—amounting to EUR 17.8 billion. In this regard, the relaxation of budgetary discipline (i.e., expenditure benchmark) is requested so that local entities can broadly spend their savings.

The Second Pillar demands the creation of three new funds:

  • one fund designed to boost economic activity. This fund will amount to EUR 5 billion in 2020 and EUR 1 billion in 2021. Additionally, 14 per cent of the grants that Spain will receive from the EU will be allocated to this fund;
  • an extraordinary fund for urban public transport to cover the current deficit caused by the Covid-19 crisis (passengers have dropped by 90 per cent). This fund will support both bus (EUR 1 billion) and subway (EUR 725 million) services;
  • a third fund will compensate for the expenses incurred by local bodies in the implementation of the new guaranteed minimum income scheme.

Assessment of the Practice

The Local Recovery Plan does not aim at an actual leveling between local governments. Indeed, an inadequate design can exacerbate the divide between rural and urban areas.

Fund allocation criteria are not yet clearly defined. However, from the perspective of urban-rural interplay, the following should be considered. First, savings are particularly relevant in big cities, which are generally over-financed (due to the local financing system). Second, a distribution key based exclusively on the total population will not address the two main problems of rural municipalities: population aging and dispersion. However, among the six priority axes of the Recovery and Resilience Mechanism scope of application is ‘social and territorial cohesion’, which can benefit the financial position of rural local entities. Third, the funds must consider the effective costs of service provision, which may adversely affect rural municipalities, where public services are more expensive (due to the lack of economies of scale). Fourth, the provincial councils are playing a unifying role to facilitate the provision of funding by the smaller municipalities. In Catalonia, for instance, provincial councils are involved in certain projects to be financed with European funds from the Recovery and Resilience Facility. For example, the Tarragona Provincial Council participates in the Tarragona Hydrogen Valley project. An alliance that aspires to be part of a strategic projects for economic recovery and transformation (known in Spanish as PERTE) around green hydrogen. Fifth, specific funds have been established to foster the digitization of rural areas. In general terms, if an inclusive digital transition is achieved, which reaches everybody, this will result in richer and more egalitarian municipalities. Finally, agriculture has been considered a key strategic sector to ensure food security. In fact, a strategic project for economic recovery and transformation (PERTE) in the agri-food sector is coming into being.

References to Scientific and Non-Scientific Publications

International Labour Organization, ‘Covid-19 and the Impact on Agriculture and Food Security’  (ILO Sectoral Policies Department 2020)       <–en/index.htm> Phillipson J and others, ‘The Covid-19 Pandemic and Its Implications for Rural Economies’ (2020) 12 Sustainability 3973