Funding local public investment
Figure 3.7. Composition of LG revenues across OECD countries Grants and other revenues
Taxes
Tariffs & fees
Social contributions
100 90 80 70 60 50 40 30 20 10
ISL
FRA
CHE
FIN
NZL
PRT
LVA
ESP
SWE
SVN
JPN
CZE
DEU
CAN
NOR
OECD
LUX
IRL
OAVG
ISR
HUN
ITA
BEL
DNK
POL
KOR
GBR
GRC
AUT
SVK
NLD
TUR
EST
MEX
LTU
0
Source: OECD (2019[30]), Government at a Glance: Public Finance and Economics, https://www.oecd.org/gov/government-at-a-glance-2019-database.htm.
Lithuanian LGs very little spending autonomy, defined as the capacity of LGs to prioritise spending and reallocate funds. Lithuania is the OECD country where LGs’ reliance on grants is the highest (Figure 3.7).
Recommendations on LG revenue mix Ensure stable and predictable revenues for LGs and increase the share of own taxes Increasing the level of LG public investment requires ensuring that LG revenues are sufficient to cover their expenditure responsibilities,4 and that LGs have the capacity to increase their revenues if they wish to finance public investment. This therefore calls for increasing the share of own taxes in the revenue mix of LGs and allowing LGs to set user fees when relevant. Revenue and expenditure balance and predictability are essential for investors. When analysing a loan request, financial institutions assess “local creditworthiness”, i.e. whether the entity will have the capacity to repay its debt in time and in full (Kalcheva and Anderson, 2018[32]). Financial analysis is the main element in the assessment of municipal creditworthiness by banks. Financial analysis assesses three elements: revenue streams, cost structure and the operating balance between revenues and operating expenditures. 4. The adequacy of Lithuanian LGs revenues to their spending responsibilities is analysed in details in the project completed by SOSE (Solutions for Economic System S.p.A.), which was funded by DG Reform.
28 . OECD – RAISING LOCAL PUBLIC INVESTMENT IN LITHUANIA
High and stable own revenues, with an important share of own taxes is considered by investors as contributing to municipal creditworthiness (Kalcheva and Anderson, 2018[32]). The higher the capacity of LGs to introduce new taxes or raise existing ones, the higher the appetite of investors to lend. In Finland for example, the right of LGs to levy a personal or corporate income tax gives municipalities the same credit risk as the central government. In New Zealand, the capacity of LGs to raise property taxes also contributes to their solid credit rating and therefore, borrowing capacity.
Assign the residential property tax entirely to the local level To increase local property tax revenue, the government should assign all property tax to the local level (as planned) and ensure proper valuation of property values. The tax exempt threshold value should be lowered further.
Rearrange the share of the personal income tax assigned to local governments The government should reform the allocation of the personal income tax and reward municipalities for increasing tax revenue. The current PIT allocation should be replaced by an arrangement where LGs set their own surtax on the national PIT, with the national PIT being reduced accordingly. an equivalent arrangement would be to change the PIT allocation so that a part of the PIT share allocated to each LG becomes strictly proportional to what is collected in that LG. Moreover, municipalities