Findings of the "Fiscal Decentralisation Report in South East Europe"

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