High inflation puts municipal finances under strain

High inflation is making life more expensive for everyone and local authorities are no exception. The high level of inflation is driving up wage costs, while at the same time energy bills and the price of building materials are also rising.

City and municipal authorities adjust their multi-year budget plans every year, taking into account the economic situation. "Most municipalities assumed that there would only be index-linked wage increase in 2022, while we now know that there will be 4 such increases for public sector employees," Belfius’ Chief economist Véronique Goossens told VRT News.

"In context we see that wage costs will rise this year by 8.4% among the Flemish local authorities and by 10.6% among municipalities in Brussels”.

In addition to higher wage costs, the cost of energy is also soaring. "As regards energy we expect a total of 105 million euros additional expenditure for the Flemish local authorities and 12.5 million euros for the Brussels municipalities. This assumes a 50% increase in bills.  However, some local authorities say that their bills are set to double or even triple”, Ms Goossens said.

Cities and municipalities that have already made significant investments in, for example insulation and solar panels, are now reaping the benefits. 

Local authorities also make a lot of investments in renovations, new builds and public works. Here too prices have also risen sharply during the past year. Prices for public works, for example, have risen by as much as 25%.

All the above additional costs are having a major impact on local authorities’ financial situation. While, they should have a balanced budget by the end of the current legislature in 2024, the Belfius study now shows that some cities and municipalities already have deficites. 

Traditionally the final two years of a municipal legislature tend to be more expensive than the first four years. “With what we know now, the financial shock will mainly be felt in 2022. Even if there will be another 2 index-linked pay rises 2023", Belfius says.

Also from next year local authorities will gradually see their income increase as inflation will start to affects tax revenue and rental income. Whether cities and municipalities will decide to increase local taxes remains to be seen.

According to the Belfius study, the multi-year budget plans of Flemish local authorities currently still plan investments totaling 11.7 billion euros between now and 2025. In Brussels, the municipalities will invest 15% more this year than they did in 2021.

Many local authorities face having to reconsider their investment plans or even scrap investments here and there. However, Belfius says that infrastructure investments for which municipal and city authorities receive subsidies from the regional authorities or the EU such as work on the sewers, roadworks and work to improve cycling infrastructure are likely to remain on the local authorities’ to do list.