This report does not constitute a rating action.
Key Takeaways
- We expect moderate debt accumulation for local and regional governments (LRGs) across developed markets (DM) through 2024-2025.
- Public investment needs remain elevated in numerous countries, but balanced budget requirements will spur many European LRGs to streamline their capital expenditure plans.
- On the other hand, Australian states and Canadian provinces are not constrained by firm fiscal rules, implying more flexibility to ramp up investment and maintain larger funding gaps.
- Sustainability-themed funding constitutes a small but growing share of outstanding debt as investor demand continues to expand.
S&P Global Ratings projects that subnational developed market (DM) borrowing needs will remain moderate in 2024-2025, compared with the elevated figures of pandemic years over 2020-2022. Annual gross borrowing will increase by about US$14 billion (2%) in 2024 compared with last year, to reach a total of US$940 billion (see chart 1). Across DMs, we estimate that about 84% of gross borrowing will be used to roll over maturities, which are generally smaller than in 2022. In light of demographic challenges, we expect investment in infrastructure, water management, and other public facilities to be the main driver of debt accumulation.
Chart 1
The reversion to pre-pandemic borrowing levels in 2024 reflects a more benign economic backdrop than many forecasters expected, with major economies like the U.S. and Europe avoiding outright recession last year. While risks to growth now appear broadly balanced, geopolitical strains--which could lead to higher spending needs or energy costs--remain a risk to our forecasts. In addition, half of the world's population heads to the polls for national elections in 2024, creating the possibility that politicians will ramp up public spending to improve their electoral prospects. And in the longer run, some LRGs that are already highly indebted must still find fiscal space to fund the global energy transition, renew ageing assets, and provide health services to rapidly graying populations.
We expect most subnational governments in the developed world will continue accessing funding from the capital markets. This will occur either directly through issuing bonds in their own names--as is the case for large issuers in Germany, Japan, Canada, and Australia--or via public-sector funding agencies (PSFAs), which help smaller entities access debt capital market funding in some countries. Moreover, we expect sustainability-themed funding will increase, primarily in Europe.
German states and Canadian provinces dominate borrowing outside the U.S. We project them to collectively borrow almost US$500 billion of gross debt over 2024 and 2025 (see chart 2).
Chart 2
In this report, we use the terms "subnational government" and "local and regional government" interchangeably.
Some Subnational Governments, Particularly Those Unconstrained By Firm Budget Rules, Are Still Increasing Borrowing
Funding gaps across developed countries vary (see chart 3). Among countries covered in this report the largest sectorwide LRG deficits (i.e., cash deficits after capital accounts) are likely to be in Australia and Canada. Since Australian states and Canadian provinces are not constrained by external fiscal rules and carry a large share of the federal responsibility for transport, healthcare, education, and other spending, we expect they will continue investing heavily in infrastructure and through public sector enterprises. Large funding gaps imply sizable net new borrowing. Australian states collectively will need net new issuance of about US$38 billion-US$46 billion per year, eclipsing the net new issuance of even their larger Canadian and German subnational peers.
Demographic challenges, characterized by ageing populations and increased migration flows, will spur investment throughout the developed world. In both Canada and Australia, for instance, a significant year-over-year increase in international migration in 2023--especially new temporary residents--contributed to growth. But it also added to political concerns about the sufficiency of existing government services. These demographic trends will also give rise to higher operating expenditure and increasing capital needs, particularly in the healthcare sector, where many LRGs report acute cost pressures.
Chart 3
New Zealand's local councils must also grapple with outsized funding gaps. The newly elected administration has repealed its predecessor's Affordable Water Reform laws, which were designed to shift responsibility (and associated spending and debt) for water infrastructure from councils to new regional utilities. If councils now remain responsible for water management and do not sufficiently hike taxes in their upcoming 10-year long-term plans, we expect further debt buildup coupled with downward pressure on credit quality (see "New Zealand Local Government Outlook 2024: Bridge Over Troubled Waters," published Nov. 20, 2023).
Other Subnationals, Mostly In Europe, Will Prioritize Fiscal Consolidation
Where muted growth and higher interest rates turn the screw on local government budgets, it could mean temporary de-prioritization of some long-term investment projects--particularly for climate adaptation and sustainability. And where fiscal rules are binding and immediate investment needs are high, we could expect to see decreasing budgetary flexibility if high-priority items are deferred.
In most of Europe, LRGs operate under a set of national rules derived from EU guidelines restricting their deficits. A major development in February 2024 saw the European Council and Parliament reach provisional agreement on new Stability and Growth Pact rules to limit debt and deficits from 2025. We think this provides a general framework for limiting budgetary deficits in Europe, but the rules will probably be more relaxed than before the pandemic, after being suspended for four years from 2020.
In countries with the strictest balanced budget requirements, such as Germany, we expect many LRGs will prioritize fiscal discipline by cutting back on public investment. Hence, funding gaps will trend toward zero (see chart 3). Moreover, we think a constitutional court ruling in November 2023 could bring scrutiny to some German states' off-budget programs that reference the energy crisis, climate transition, or the implications of the Russia-Ukraine war, for which they claim an exemption from the debt brake rule (see "German Top Court's Ruling Could Have Material Effects Also On States And Municipalities," published Dec. 8, 2023).
Even in countries where the balanced budget requirement excludes capital spending, such as Finland and Sweden, we expect that many LRGs will impose stricter investment priorities to meet self-financing targets. In the Nordics, the increased funding gaps expected through 2025 should be viewed in the context of extraordinarily high state transfers distributed in response to the financial pressures caused by the pandemic. Consequently, the projected widening funding gaps can be considered a return to more normal pre-pandemic levels.
Spanish regions have benefited from continued receipt of Next Generation EU funds and favorable regional financing settlements. In 2024-2025, we expect funding gaps will be small so that the stock of debt will remain stable. By our debt-to-revenue measures, Spanish regions are already deleveraging (see chart 4).
For Japanese LRGs, we expect stable tax revenues and fiscal equalization transfers from the central government will help counter inflationary pressures on expenditures, structural increases in social welfare costs, and the first hints of rising interest costs after a long stretch of ultra-loose policy. In fact, we project net new borrowing for Japanese LRGs will be negative across 2022-2025. We also expect negative net new borrowing for the subnational systems in Switzerland and the Netherlands.
An Antipodean Rift Is Emerging
Relative to budget size, LRGs in New Zealand are now the most highly leveraged among DM peers, having swapped places with Canadian LRGs in 2021. Their sectorwide debt stands at a lofty 176% of operating revenue at year-end 2023 (see chart 4). And as noted above, Australian states are the fastest risers. We expect their debt burden to grow by 24 percentage points of operating revenue to 153% by 2025.
Our rating trends have generally mirrored these debt movements: downgrades have outnumbered upgrades 3:1 among Australian states since the onset of the pandemic, while in New Zealand 84% of rated LRGs have a negative outlook. Heavy capital spending in New Zealand and Australia is in part needed to accommodate rapid population growth: the two countries' populations expanded 16%-17% in the decade to 2021, compared with just 1% in Europe over the same timeframe.
Chart 4
Total Debt Outstanding Continues To Rise
We expect new borrowing to lift DM LRGs' debt outstanding to almost US$8.4 trillion by year-end 2025. LRG debt remains very concentrated geographically, with the U.S. accounting for about 40% of DM subnational debt, followed by Japan, Canada, and Germany at just under 35% combined (see chart 5).
Chart 5
Debt Capital Markets Will Remain The Primary Funding Source
We project DM LRGs' gross bond issuance to reach the equivalent of US$693 billion in 2024, which will cover about 75% of LRGs' borrowings. We estimate that LRGs in Canada, Germany, and Australia will issue about 30% of total bonds (see chart 6).
Chart 6
In Canada and Australia, bonds are by far the most common form of subnational debt. In Germany, states have also increasingly shifted toward capital market financing in recent years, with bonds now representing about 58% of debt, compared with 50% in 2016. We expect the largest issuers, including North Rhine-Westphalia, Baden-Wuerttemberg, and Hesse, will acquire most of their financing from the bond market.
In contrast, most LRGs in the Nordics, and some in France, Japan, and the Netherlands, access the capital markets via PSFAs and similar mutual-style publicly owned banks.
Austrian, Italian, and U.K. LRGs meet almost all their funding needs by borrowing from the central government and its agencies. Most Italian subnational borrowings in recent years were loans from state lending arm Cassa Depositi e Prestiti, to settle arrears payments and fund long-term investments. U.K. LRGs' borrowings are dominated by the central government's Public Works Loan Board (PWLB). Japanese LRGs also benefit from access to the central government's direct lending scheme.
In Spain, where central government on-lending and European Investment Bank (EIB) loans play an important role in financing subnational governments, the central government is pushing for LRGs to increase their share of capital market funding. Spanish regions and autonomous communities are gradually returning to bond markets after having been locked out during the eurozone sovereign debt crisis, and in response to the rigidity of the central government's Autonomous Financing Fund (FFA in Spanish). For regions such as Madrid, the use of market financing means an LRG can borrow at longer maturities than if it were to finance itself through central government liquidity.
In most cases, LRGs issue bonds domestically and in local currency. Only the largest LRGs and PSFAs take on any currency risk. In addition to their Canadian-dollar programs, Canada's provinces have sizable foreign-currency programs, regularly issuing in U.S. dollars, euros, pound sterling, Australian dollars, and even Norwegian krone. We see this diversification as important, given their large amount of nominal borrowing. North Rhine-Westphalia, as the largest German state by economic size, issues bonds in 10 different currencies.
Central banks are in a process of passive quantitative tightening, letting bonds roll off their balance sheets at maturity. The withdrawal of a large buyer from the market will generally add to upward pressure on yields. For the European Central Bank (ECB), for example, maturing principal payments from subnational securities bought under the Pandemic Emergency Purchase Program (PEPP) will be reinvested until at least end-2024, but in July 2023 the ECB discontinued reinvestments under its separate Public Sector Purchase Program (PSPP).
Large Regions: Province of Ontario Tops The Charts Outside The U.S.
Among individual names, Ontario remains by far the largest issuer, singlehandedly accounting for more than US$300 billion of bonds on issue (see chart 7). The eastern Australian states, meanwhile, have climbed the charts as overseas peers scaled back issuance.
Chart 7
Our country-by-country forecasts can mask wide divergences among LRGs in a single country (see chart 8). This is most evident in Australia, where Western Australia is running a roughly balanced budget after capital accounts while Victoria will post a cash deficit of about 24% of revenues in 2024. The subnational imbalance in Australia reflects both strong mineral royalties and a favorable federal grant distribution that both work in Western Australia's favor. Similarly, we project the oil-rich provinces of Alberta and Newfoundland and Labrador will run persistent surpluses after capital accounts over budget years 2022-2025, outperforming the Canadian subnational average.
Chart 8
Higher Interest Costs Don't Materially Affect Budgetary Performance
The longer tenor and slower amortization profile of borrowings before and during the pandemic has helped insulate some highly indebted LRGs from exposure to rising rates. Although interest rates have likely peaked in most jurisdictions, we expect debt servicing costs will take up a larger share of budgets going forward as LRG debt rolls over, and if borrowing shifts toward shorter maturities.
Favorable market conditions in most developed markets over recent years have allowed DM LRGs to build debt portfolios with large proportions of fixed-rate debt and gradual repayment schedules. The share of fixed-rate debt in DM LRGs' debt portfolios in most cases surpasses 80%. Refinancing needs are relatively manageable, with usually less than 20% of direct debt being rolled over each year (see chart 9). Outliers include Israel, where over 90% of municipal borrowing is floating rate or linked to the consumer price index, and New Zealand and Norway, where we estimate that 40%-65% of debt (after interest rate swaps) is at a floating rate.
Chart 9
Developed Market LRGs Are Broadening Their Funding Channels
Sustainable-labeled debt remains a small but growing share of borrowing. We expect green, social, sustainable, and sustainability-linked debt will continue to grow both in nominal terms and as a share of LRG issuance in 2024 (see chart 10). We project sustainable issuance by LRGs will climb 10%-15% to over US$34 billion in 2024, even as gross borrowing of LRGs remains moderate. Labeled borrowing grew by US$6 billion (24%) last year alone.
Chart 10
Subnational borrowers have often been first movers in labelled debt, ahead of their respective central governments. In 2013, Gothenburg in Sweden became the first city in the world to issue green bonds, after which many LRGs around the world have followed suit. In Canada, Ontario launched its first government-sector green bond in 2014, eight years ahead of Canada's inaugural sovereign green bond in 2022. Victoria was similarly the first government in Australia to issue a green bond, in 2016, well ahead of the Australian sovereign's planned first foray into the market in 2024.
Labeled issuance in 2024 will again be led primarily by subnational borrowers in Europe, although Japanese prefectures, Australian states, and Canadian provinces will also contribute meaningfully to the total. Growth will occur as new issuers enter the market and on the back of greater public interest in climate resilience (see "Sustainability Insights Research: Sustainable Bond Issuance To Approach $1 Trillion In 2024," published Feb. 13, 2024). Still, we expect sustainable debt issuance to account for a tiny fraction of overall bond issuance--just 1%-2%--particularly in developed markets, as the economic benefits of labeled debt have yet to materialize in a way that would incentivize broader uptake.
Chart 11
Financing for climate adaptation will be an important and growing need for local governments in the next decade, although they may opt not to meet it with labeled debt: climate change adaptation has been cited less frequently as a use of proceeds to date.
In 2023, a few Swiss LRGs, including the Cantons of Zürich, Basel-City, and the city of Lugano, issued "digital bonds" using the central bank digital currency introduced by the Swiss National Bank. Global issuance of such digital bonds could increase, albeit from a base of almost zero in 2022, as other entities trial small issuances (see "Digital Bonds: The Disruption Is Underway," published Feb. 27, 2023).
Table 1
| Gross borrowings and debt stock by country | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross borrowings (Mil. $) | Debt stock (Mil. $) | |||||||||||||||||||
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023e | 2024f | 2025f | 2025f | ||||||||||||
| Australia | 29,688 | 31,023 | 64,012 | 78,050 | 67,684 | 68,571 | 58,406 | 64,138 | 448,589 | |||||||||||
| Austria | 5,991 | 5,534 | 8,895 | 8,714 | 4,878 | 5,763 | 3,024 | 3,524 | 49,698 | |||||||||||
| Belgium | 11,468 | 11,801 | 26,480 | 20,844 | 22,134 | 20,169 | 20,215 | 19,776 | 162,070 | |||||||||||
| Canada | 110,407 | 116,723 | 148,606 | 115,016 | 117,213 | 96,212 | 89,159 | 106,772 | 971,801 | |||||||||||
| Denmark | 3,132 | 3,834 | 3,618 | 3,074 | 3,328 | 3,757 | 3,981 | 4,337 | 49,028 | |||||||||||
| Finland | 5,788 | 6,310 | 5,611 | 5,384 | 5,157 | 4,553 | 5,747 | 7,432 | 60,176 | |||||||||||
| France | 15,779 | 15,250 | 20,994 | 22,150 | 20,356 | 17,111 | 24,015 | 23,617 | 217,272 | |||||||||||
| Germany | 131,119 | 153,053 | 221,775 | 154,250 | 97,560 | 131,966 | 137,776 | 157,250 | 877,686 | |||||||||||
| Israel | 495 | 580 | 1,104 | 990 | 761 | 606 | 638 | 711 | 4,974 | |||||||||||
| Italy | 4,972 | 3,352 | 4,805 | 6,146 | 5,419 | 1,657 | 5,514 | 5,628 | 117,867 | |||||||||||
| Japan | 95,164 | 99,716 | 114,834 | 107,012 | 66,781 | 59,401 | 62,532 | 58,975 | 1,023,824 | |||||||||||
| Netherlands | 6,141 | 6,717 | 5,254 | 7,096 | 4,633 | 4,318 | 5,466 | 5,694 | 42,132 | |||||||||||
| New Zealand | 1,659 | 3,163 | 4,208 | 3,271 | 4,168 | 4,504 | 3,390 | 4,076 | 20,280 | |||||||||||
| Norway | 17,579 | 18,709 | 18,591 | 20,091 | 18,811 | 17,617 | 18,135 | 19,445 | 94,839 | |||||||||||
| Spain | 47,840 | 45,543 | 73,972 | 69,685 | 52,611 | 53,841 | 45,027 | 46,944 | 403,356 | |||||||||||
| Sweden | 25,668 | 25,587 | 30,969 | 25,857 | 26,264 | 22,301 | 23,904 | 24,539 | 100,257 | |||||||||||
| Switzerland | 12,544 | 18,279 | 24,277 | 15,507 | 10,912 | 13,978 | 14,395 | 14,274 | 99,220 | |||||||||||
| U.K. | 16,682 | 18,990 | 8,563 | 14,290 | 9,300 | 18,750 | 18,854 | 20,042 | 243,972 | |||||||||||
| U.S. | 394,182 | 347,455 | 428,385 | 461,309 | 485,000 | 380,500 | 400,000 | 400,000 | 3,385,583 | |||||||||||
| e--Estimate. f--Forecast. Source: S&P Global Ratings. | ||||||||||||||||||||
Countries Covered In This Report
Our survey on DM LRG borrowing encompasses 19 countries: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Israel, Italy, Japan, New Zealand, Norway, Spain, Sweden, Switzerland, the Netherlands, the U.K., and the U.S. We consider this sample representative of DM LRG debt. We have also published separate and more detailed analyses of projected borrowings in the LRG sectors of various regions (see Related Research). We base our survey on data collected from statistical offices, as well as on our assessment of the sector's borrowing requirements and outstanding debt, which includes bonds and bank loans. The reported figures are our estimates and do not necessarily reflect LRGs' own projections. For comparison, we present our aggregate data in U.S. dollars.
Related Research
- Subnational Debt 2024: France, Adaptability Will Remain Key Amid Sluggish Growth, March 4, 2024
- Subnational Debt 2024: Spain (Debt Absorption Scenarios): All could benefit, with some more than others, March 4, 2024
- Subnational Debt 2024: Australian States' Debt Rift Deepens, Feb. 29, 2024
- Subnational Debt 2024: Canadian Local And Regional Governments Are Running Fast To Stay In Place, Feb. 29, 2024
- Subnational Debt 2024: Chinese Governments Reach Their Limits; Other Emerging Markets Taper Borrowing, Feb. 29, 2024
- Subnational Debt 2024: Global LRGs Can Handle Rising Interest Expenses, Feb. 29, 2024
- Subnational Debt 2024: Focus on debt sustainability, Feb. 29, 2024
- Subnational Debt 2024: Germany, Subdued Fiscal Performance Suggests Borrowing Will Rebound, Feb. 29, 2024
- Subnational Debt 2024: Infrastructure Spending Succumbs To Economic Slowdown, Feb. 29, 2024
- Subnational Debt 2024: Spain: Lower borrowings, but bond issuances recover, Feb. 29, 2024
- Subnational Debt 2024: Switzerland, Resilient Budget Surpluses Should Enable Further Deleveraging, Feb. 29, 2024
- China City Governments Risk Falling Into A Debt Trap, Feb. 20, 2024.
- Sustainability Insights Research: Sustainable Bond Issuance To Approach $1 Trillion In 2024, Feb. 13, 2024
- German Top Court's Ruling Could Have Material Effects Also On States And Municipalities, Dec. 8, 2023
- Canadian Municipalities Exercise Available Flexibility To Preserve Budgetary Strength Amid Rising Costs, Dec. 7, 2023
- New Zealand Local Government Outlook 2024: Bridge Over Troubled Waters, Nov. 20, 2023
- Spanish Regions May Receive Debt Relief From State, Nov. 8, 2023
- Spanish Regional Finances Should Pick Up After A Weak 2022, May 3, 2023
- Credit FAQ: Italy's Decentralization Push Unlikely To Affect Budgets But Could Broaden Regional Differences, April 6, 2023
- Digital Bonds: The Disruption Is Underway, Feb. 27, 2023
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