Local budget capacity as a foundation for financial resilience of territorial communities in wartime conditions

Abstract

The issue of financial resilience of territorial communities has become critically important under conditions of full-scale war, which has significantly transformed the fiscal environment and functioning of local budget systems in Ukraine. The decentralization reform has expanded the financial autonomy of territorial communities, strengthening their role in local governance and resource management. However, wartime conditions have led to instability of revenue sources, increased expenditure pressures and structural disruptions in local economies, making the capacity of local budgets a key determinant of financial resilience. This article aims to explore the role of local budget capacity as a foundation for ensuring the financial resilience of territorial communities, focusing on its structure, functions and mechanisms of influence. The study substantiates that local budget capacity represents an integrated ability of territorial communities to generate, distribute and effectively utilize financial resources under conditions of uncertainty and crisis. Based on theoretical and empirical analysis, a conceptual model is developed, which reflects the interconnection between local budget capacity, functions of local budgets, mechanisms and instruments of fiscal influence and key impact areas, including socio-economic development, financial stability, financial security, democratic development and welfare of the population. The findings indicate that financial resilience is formed as a systemic result of these interactions and depends on the level of fiscal autonomy, diversification of revenue sources and effectiveness of financial management. Communities with higher levels of budget capacity are better able to adapt to wartime challenges, maintain stability and ensure continuity of essential services. At the same time, excessive dependence on intergovernmental transfers and limited own revenue bases may reduce resilience and increase vulnerability to external shocks. The study emphasizes that strengthening local budget capacity is a crucial prerequisite for ensuring financial resilience and sustainable development of territorial communities in both wartime and post-war recovery conditions.