An OECD working paper published on 13 June 2024, written by Acauã Brochado and Sean Dougherty, looks at problems of financing for subnational governments (SNGs), including the level of debt and sensitivity to interest rate fluctuations. The paper Riding the rollercoaster: Subnational debt in turbulent times notes that most bonds issued by subnational governments have fixed rates and long maturities, but some jurisdictions are exposed to interest rate and foreign currency risks. The paper looks at adequate fiscal rules, tax autonomy and insolvency frameworks that can help mitigate the risks.  The paper provides insights for policymakers looking at future reforms of the SNG bond markets, to strengthen market discipline and increase resilience.

In the OECD countries SNG debt represents on average 11% of GDP, or 150% of the SNGs’ own revenues. The general government debt levels have reached historic high levels since the year 2020. Although this is mostly concentrated in central governments, in some countries SNGs represent a large share of public debt. For example, in Canada SNG debt is almost 50% of GDP and in China, depending on the estimate for Local Government Investment Vehicles (LGIVs), SNG debt may be as high as 70% or 80% of GDP.

There appears to be some correlation between SNG debt levels and tax autonomy. The extent to which SNGs can steer their own revenues, and raise more revenue to pay the debt if needed, may be relevant for how much they can borrow. The authors note that the statistics indicate a slightly positive relation between debt and autonomy.

The paper notes that well-designed insolvency frameworks can also help. Insolvency frameworks that give clarity about how unsustainable debt cases will be resolved can reduce the cost of crises. A clear framework can create an environment where excessive debt is effectively avoided because the risks are well-defined.