Managing the crises – how did local governments react to the financial crisis in 2008 and what explains the differences? The case of Swiss municipalities 1

Abstract

Swiss municipalities are, to a large extent, responsible for their financial resources. Since these resources primarily depend on income and property taxes from individuals and enterprises, municipality budgets are likely to be directly affected by the current crisis in the financial sector and the economy. This article investigates how municipalities perceived this threat and how they reacted to it. In a nationwide survey conducted at the end of 2009 in all 2596 Swiss municipalities, we asked local secretaries which measures had been launched in order to cope with expected losses in tax income and a possible increase in welfare spending. Did the municipalities rely on Keynesian measures increasing public spending and accepting greater deficits, or did they try to avoid further deficits by using austerity measures and a withdrawal of planned investments? Our results show that only a few municipalities – mainly the bigger ones – expected to be greatly affected by the crisis. Their reactions, however, did not reveal any clear patterns that theory would lead one to expect. Preferences for austerity measures and deficit spending become visible but many municipalities took measures from both theories. The strongest explanatory factors for determining how/why municipalities react are: the municipality’s level of affectedness followed by whether or not the municipality belongs to the French-speaking part of the country. Size also has an impact, whereas the strength of the Social Democrat party is negligible. Explaining what kind of measures municipalities are likely to take is more difficult. However, the more a municipality is affected, the more likely it is to stick to austerity measures.

Points for practitioners

How to react to a financial crisis is not only a challenging question to answer for the scientific community but also for practitioners being confronted with the crucial decisions to be taken. This contribution shows that the theoretical debates stipulating the exclusiveness of deficit spending or austerity measures is hardly reflecting reality, at least not at the local level. Policymakers are well advised to cut down expenditure and to invest where necessary. This is, at least, what can be learned from the practices of the Swiss municipalities after the 2008 crisis.