Network of Associations of Local Authorities of South-East Europe
Local Government Finance Reform in South-East Europe Thomas Prorok, Managing Director, KDZ, Centre for Public Administration Research Elton Stafa, Fiscal Decentralization Expert, NALAS, Network of Associations of Local Authorities of South-East Europe
CEMR Expert Group on Local Finances Meeting 30-31 January 2024, Brussels
What is NALAS?
14 member LGAs 9000 local authorities Local Government Finance in South-East Europe: Key D ata 3rd Edition
Comparative overview of fiscal decentralization and intergovernmental fiscal relations in South-East Europe 9th Edition
➔ Migration and brain drain in SEE
13%
7% 5% 1%
1%
3%
0%
-7% -11%
-10%
-6%
-6%
-5%
-4%
-9%
-27%
Percent change in population in SEE, 2012-2021
50.3%
➔ Larger public sectors and more decentralized revenues in EU
43.3% 39.0% 35.9%
32.0% 27.0%
27.4%
32.3%
36.2%
26.5%
26.3%
24.4%
16.3%
14.2%
17.4%
19.3%
14.0%
11.9%
ALB
RKS
41.1%
32.7%
17.4%
7.1%
46.9%
28.0%
25.8%
3.8%
41.0%
44.3%
46.2%
3.3% TUR
11.7% 8.4% MDA
5.6% MKD
Publc Revenue, % of GDP
8.7% ROU
5.6%
6.1%
7.5%
WB6
SEE
BGR
15.2%
15.1%
11.1%
10.5%
4.8%
4.5%
6.1%
6.7%
7.0%
SVN
BIH
SRB
MNE
HRV
Local Government Revenue, % of GDP
11.4% 5.3% EU
In % of Public Revenue
Total public and local government revenue in South-East Europe, 2021
AUT
3,718
➔ WB6 has 10 % of
EU27 LG Revenues
3,072
1,055 1,078
1,185
746 206
236
342
258
272
275
316
316
347
449
535
558
Local Government Revenue in SEE Euro per capita, 2021
12.0%
➔ LG revenues have
improved in half of SEE countries
10.0%
MDA ROU
8.0% MNE 6.0% BGR SVN
4.0%
AUT (2012)
WB6
RS (BiH)
BiH
FBiH (BiH)
ALB
2.0%
0.0%
TUR
SRB
HRV
MKD RKS
2006
2009
2020
2021
Local Government Revenue in SEE Percent of GDP, select years
• LGs in Kosovo, Moldova and Romania receive 26-27% of all public revenues. • LGs in Albania and Turkey have smallest shares to the GDP.
LG Revenues as a share of Public Revenues
30%
ROU
RKS
25%
20%
MDA
EU
BGR MKD WB6
15%
RS (BiH) SRB
ALB TUR
10%
BIH FBiH (BiH)
SEE
HRV MNE
SVN AUT
5% 3%
5%
7% 9% LG Revenue as a share of GDP
11%
Local Government Revenue in SEE, Share of GDP & Public Revenue,2021
13%
➔ COVID-19 brought major declines in the LG Own Revenues ➔ It interrupted a fiveyear sequence growth in LG revenues of on average 5% per annum in SEE (excluding Türkiye) and 7% per annum in the WB6.
0% MKD
RKS
TUR
FBiH (BiH)
HRV
BiH
ALB
RS (BiH)
WB6
SEE
-7%
MNE
MDA
SRB
SVN
-3%
-3%
-3%
BGR
ROU
1%
AUT
-1%
-7%
-10% -11% -14% -16%
-16%
-13%
-13%
-15%
-20%
COVID: Annual Change in Own LG Revenues In percent, annual change 2019-2020
Decrease of Own Revenues
➔Decrease of own revenues = increase of dependency
➔The share of sectoral and earmarked grants doubled
SEE 2021
SEE 2006 Own Revenues
10%
6%
Shared Taxes
10% 33%
General Grant
20%
44%
13%
Sectoral Block Grants Earmarked Grants
14% 26%
23%
Increase of sectoral and earmarked Grants
Composition of LG Revenue in SEE Percent of total, 2006,2021
100%
➔ Limited LG tax powers ➔Property tax is lead local tax ➔Other local taxes needed?
➔ Importance of fees?
90%
6%
26%
6%
6%
11%
16%
27%
18%
12% 10%
7%
12%
5%
13% 29%
15%
44%
32%
16%
13%
5%
12%
4% 15%
59%
15%
20%
33%
60% 50%
10%
36%
30%
8%
7%
6%
80%
70%
14%
41%
11%
35% 34%
52%
30%
13%
33%
40%
72%
6%
40%
68%
74%
47%
17% 13%
32%
7%
30% 20%
32%
45%
38%
37%
28%
6%
19% 10%
0% MDA
Property tax
RKS
ROU
32%
43%
36%
28%
10%
BGR
Land dev. tax/fee
HRV
MKD
Other local taxes
SVN
FBiH RS (BiH) (BiH) Fees & charges
28%
27%
WB
SEE
18%
15%
6%
4% BIH
7%
TUR
Asset revenue
SRB
ALB
Other
AUT
MNE
Share of OSR to total LG Revenues
Composition of LG Own-Source Revenue Percent of total, 2021
150
➔ Wide disparities
in the property tax revenues
129
92
85 72
59 50
52
HRV
SEE
43
30 23 9
12
MDA
RS (BiH)
FBiH (BiH)
15
15
TUR
ALB
20
RKS
MKD
WB6
Property Tax Revenues EUR per capita, 2021
BGR
SRB
ROU
AUT
MNE
SVN
➔ SEE LGs spend more on education (24%) than EU (16%) ➔ EU LGs spend 22 % of their budgets for social protection (5% in SEE)
General Public Services
5%
Education Economic affairs Housing and community amenities
5% 22%
3% 4% 2%
3%
EU27, 15%
SEE, 20%
7% 16%
Recreation, culture and religion Health
15%
Social protection Environmental protection Public order and safety
24% 19%
13%
17% 6%
4%
Local Government Expenditure
I n percent of total, functional classification 2021
8%
➔ High differences in education
2%
7%
2%
11%
6%
6%
6%
10%
3% 5%
18%
13%
19%
17%
6%
21%
7%
4%
25%
➔ COFOG data often not available
4% 5%
6%
10%
7%
14%
14%
15%
5%
5%
6%
8%
12%
9%
6%
16%
53% 46%
53%
5% 1%
27%
8%
5%
7%
22%
19%
17%
24%
5%
19% 24%
19%
18%
6% 4%
13%
1% 24%
22%
17%
20%
42%
5%
9%
21%
11%
17%
4%
9%
24%
24%
7%
➔ Low shares in social protection (4% versus 22% in EU)
5% 5%
4% 4% 5%
23% 12%
47%
16%
36% 9% 6%
8%
11%
ROU
MDA
BGR
15%
16%
18%
RKS
AUT
ALB
25%
WB6
19%
20%
20%
21%
SRB
SEE
SVN
HRV
15%
TUR
General Public Services
Education
Economic affairs
Housing and community amenities
Recreation, culture and religion
Health
Social protection
Environmental protection
Public order and safety
FBiH (BiH)
EU27
Local Government Expenditure in SEE I n percent of total, functional classification.
2021
➔ LGs in SEE spend
more on capital investments and less on salaries than EU
Investments
2%
Wages and benefits Goods and services
Grants and transfers
6%
27%
EU27, 14%
SEE, 25%
16%
Other
22%
33%
31% 24%
Local Government Expenditure
I n percent of total, economic classification 2021
➔ 35% in SEE versus 54% of Public Investment in EU 72%
➔ LG investments
87%
83%
74%
72%
71%
68%
66%
62%
64%
58%
59%
55%
51%
51%
49%
49%
ROU
MDA
46%
make up to: o 1.5% of the GDP
o 25% of local expenditure o 35% of public expenditure
13%
17%
SRB
ALB
28%
26%
28%
29%
32%
MNE
AUT (incl. Vienna)
BiH
MKD
RKS
34%
35%
36%
38%
41%
45%
HRV
SEE
TUR
WB6
BGR
SVN
LG Investment as % of Public Investment
54%
EU27
HLG Investment as % of Public Investement
Composition of Public Investment in SEE In percent of total, 2021
Intergovernmental Transfers Determination of size of general-purpose /unconditional(equalization) grants • • • • • • • • • • •
Albania: no less than 1% of GDP + no less than amount allocated the year before Bulgaria: 10% of Local OSRs collected in previous year at national level North Macedonia: 5.5% of VAT Kosovo: 10% of the central gov’s budget Romania: 6% of shared PIT Slovenia: 30% of shared PIT Montenegro: Pool of national taxes (11% PIT, 20% Property Transfer Tax, 100% Vehicle Tax) Bosnia and Herzegovina: 8.42% of indirect taxes in FBiH and 24% in RS Serbia: Eq. Grant defined as residual after the allocation of PIT shares to LGs + Gen. Grant (as remainder) Croatia: Fiscal Eq. Fund and Eq. Fund for Decentralized Functions Moldova: balancing fund, financed by remainder of PIT revenues shared with LGs
Intergovernmental Transfers The allocation criteria of general-purpose grants Principles: • Equity: is the allocation based on objective allocation criteria taking into account differences across municipalities? • Efficiency: (as much as possible) neutral to local political choices. In some countries seems more neutral than in others.
Common criteria for spending needs: • population (and its structure, in particular children, students, elderly) • population density; surface area; no. of settlements; • no. of classes in elementary and primary/secondary schools; no. of school buildings; • length of municipal roads; • ethnic minorities; • development index; • fixed percentage (lump sum) • Specific rules for capital cities;
Common criteria for fiscal capacity: • own source revenues collected compared to own plan or average (MKD, BGR) • shared tax revenue allocations by jurisdictions compared to national averages serve as primary basis for horizontal equalization (MKD, HRV, SRB, ALB, etc.)
• Ensuring comparability – COFOG
CONCLUSIONS
• Overview of grants – conditional, unconditional, sectoral… in EU CHALLENGES
• Experiences with Fees, Charges and other local taxes (in EU) Insights in equalisation systems of EU countries
• Low Local Government Revenues in WB (5,6% versus 11,4% of GDP in EU)
• Insights in equalisation systems of EU countries
• Decreasing Own Revenues: 44% 2006 to 33% 2021 of total Local Revenues
• Links to ComPAct (European Administrative Space) and Technical Support Instrument
• Increase of sectoral and earmarked grants (from 16% 2006 to 30% 2021)
• LoGPACK
• Low investments from Local Level (35% in SEE versus 54% of Public Investment in EU) • No social protection competences and expenditures
• High reliance on Property Tax
• CEMR Local Finances Report?
TO BE CONSIDERED – NEXT STEPS
NALAS Regional Decentralization Index Participation & Responsiveness
Intergovernmental Dialogue
Local Autonomy
Quality of Services
Political
Communal Services
Citizen Participation
LGA positioning for dialogue
Social Services
Transparency
LGA consultation with members
Administrative Fiscal
4 Dimensions 17 Indices 9 sub-indices 97 indicators
Resilience LED Smart Cities
Accountability Responsiveness
Intergov. Consultation practice Impact of LGA proposals LGA involvement at international level
Thank you Thomas Prorok, KDZ Managing Director prorok@kdz.or.at Elton Stafa, NALAS Fiscal Decentralization Expert stafa@nalas.eu