Different Factors That Influence Financial Decisions of Local Government

Different Factors That Influence Financial Decisions of Local Government | Student FinTech

When we watch the news, it’s easy to question why our government does certain things. But the fact is, there are a lot of factors behind the scenes that we don’t see. Local government and their financial decisions are no exception. We decided to take a closer look and delve into the factors that influence the financial decisions of local government, and this is what we found:

Political Involvement

Budgets are a big indicator of how citizens view the government as opposed to how politicians see it. The budget plays a big part in interacting with the community – do people utilize the services offered, and are they happy with them? What does the community seem to care about the most? What are the most popular services with certain age groups? Questions like these help local government discern whether or not the money they’re spending is making an impact, and what the community wants more of less of, especially between generations.

Economic Influences

Economic factors that shape local government budgeting include:

  • Inflation

Inflation develops uncertainty in local government revenue and expenditure forecasts, because when the cost of living goes up, it presents pressure to keep people’s wages at a livable rate respective to rising costs.

  • Economic Cycles

Ways in which economic downturns impacts local budget include decline in revenues, including sales and income taxes. State and federal revenues also take a hit during a recession, which means that the aid they are able to provide to local governments may decline.

  • Interest Rates

Although the impact on a local level may not be as large as it is on a national level, interest rate changes are also a factor on the budget.

Social and Demographic Change

Social and demographic factors are also at play when it comes to the local budget, including:

  • Population

As population continues to grow, fixed costs split up among more households results in lower per-unit costs. Even for communities with a stagnant or declining number of population, it can be a struggle to reduce spending, since financial obligations remain the same regardless of population.

  • Age Distribution

Age distribution among the population can have a major impact on the budget – as such, the categories most likely to be affected are public safety, recreational services, and spending for public education.

  • Personal Income

Personal income may not seem like a factor when it comes to local budgets, but higher-income households often want more or enhanced governmental services, which creates stress on the budget.

Legal and Intergovernmental Matters

Legal and intergovernmental factors can also influence local budgets in these ways:

  • Balancing the Budget

Current revenue must equal current spending. However, it can vary depending on two factors: when cash is received, is revenue recorded, or is spending recorded when cash is received?

  • Mandate

The federal and state government both impose mandates on local governments, which includes scenarios such as a certain level of government requiring another level to follow procedures or provide a service.