Innovation During Inflation: Why Local Governments are Betting on Modernization

Across the country, local governments are facing a confounding paradox. On one hand, they’re contending with inflation, labor market pressures, and aging infrastructure that strain already-limited resources. On the other hand, they’re expected to deliver efficient, transparent, and modern services that meet the needs of growing and increasingly complex communities. It’s a challenging environment, shaped by macroeconomic uncertainty and fiscal pressures that make every budget decision carry greater weight.

How are communities responding?  The 2025 Local Government Budgeting & Planning Outlook Report surveyed nearly 200 public finance leaders and executives and analyzed over 100 budget books to shed light on the answer. The findings show that while costs are rising and challenges are mounting, local governments aren’t standing still. They’re strategically prioritizing modernization and software investments to weather volatility and prepare for the future.

Budgets Under Pressure and on the Rise

Local officials expect their budgets to remain stable or grow modestly in the year ahead, despite the headwinds they face. Personnel, operating, and capital budgets all follow this trend, with only a small minority of respondents anticipating cuts. Even capital budgets—often the most volatile—show just 16 percent expecting declines.

The numbers reflect what we saw in our review of more than 100 budget book transmittal letters. Inflation is driving up costs across the board, from fuel and utilities to service contracts, health insurance, and pensions. Governments are also dealing with higher capital costs, with construction materials, equipment, and vehicle replacements climbing in price.

Labor market dynamics are adding to the pressure. Many governments are finding it harder to recruit and retain qualified staff, and they’re raising compensation and benefits to stay competitive. At the same time, deferred maintenance and aging infrastructure are forcing communities to devote more resources to long-neglected needs. And in fast-growing areas, population increases and economic development are stretching capacity even further—demand for services, infrastructure, and staff is rising faster than revenues can keep up.

Put simply, budgets are going up because they have to. Expansion is less about having room to grow and more about absorbing rising costs, maintaining current services, and ensuring governments don’t fall behind.

The Top Priority: Modernization

Against this backdrop of fiscal strain, it’s no surprise that modernization has become the leading investment priority for 2025. When we asked finance professionals to name their top two initiatives for the coming year, 60 percent selected “modernizing inefficient systems,” making it the most common choice by a wide margin.

Modernization today is closely tied to software. Local governments know that replacing outdated, manual processes with purpose-built financial tools is one of the most effective ways to gain efficiency and accuracy. In the near term, 36 percent plan to invest in budgeting software, 31 percent in financial reporting solutions, and 28 percent in forecasting tools. These core systems directly support the functions governments rely on most and are often the first place leaders look for time savings and better data.

Looking ahead, more leaders are also starting to focus on longer-term modernization. About 19 percent say they’ll invest in strategic planning software a year or more out, recognizing that technology has to support not just daily financial management but also long-range visioning and fiscal sustainability.

Together, the data makes the case clear: modernization is no longer optional. Governments are prioritizing software investments because they know it’s the most reliable way to control costs, strengthen accountability, and free up resources for community needs.

The Path Forward: Resilience Through Intuitive Investments

Local governments are navigating a tough economic landscape, where inflation, labor shortages, and infrastructure needs collide with rising demands for efficiency and transparency. The 2025 Local Government Budgeting & Planning Outlook Report shows that leaders aren’t retreating in the face of this uncertainty. They’re doubling down on modernization as the best way to stabilize operations and prepare their communities for what’s next. 

By continuing to invest in modern financial systems, governments can turn today’s uncertainty into tomorrow’s resilience. These investments aren’t just about efficiency—they’re about building the capacity to adapt, maintain trust with stakeholders, and make better decisions in the face of volatility. In an era where every dollar matters, modernization is the surest way for local governments to keep moving forward.