Inadequate local government financing

Inadequate local government financing is caused and compounded by several factors. Towns tend to be caught in the dilemma that, while central government (due to the worsening economic situation or to ideological reasons) is unable or unwilling to fulfil its obligations, there is also reduction of their own revenues, caused by the exodus from the inner city. Taxpayers who leave tend to be relatively more prosperous than those who stay, so that government yield of local taxes decreases while an increasing percentage of expenditure goes to the support of the needy inhabitants who remain in the city.

Excessive reliance by local government on grants, or on unexpected increases in them, can result in poor use of public finances. Grants can encourage recipients to be less efficient and can decrease the fiscal autonomy of local regions.