Local and regional finances: state allocation vs. taxation
The impact of public administration and territorial reforms are not limited solely to the number of governmental units existing at the regional or local tier. The changes that ensue may also significantly alter the nature of local and regional governments’ finances, depending on the territorial reforms’ intended objectives. In the case of territorial reforms aimed at advancing decentralisation processes and thereby modifying subnational governments’ remit and responsibilities, it is crucial that thought be given to their funding. This should either be through the transfer of additional funds or the mobilisation of own resources through taxation. This can support fiscal decentralisation, i.e. the delegation of spending and revenue responsibilities from central governments to lower tiers of government, enablingLRGsto efficiently take on their new additional tasks.
Over the past decade, manyCEMRmembers have witnessed numerous changes to the public financial framework aimed at improving the powers of municipal and regional councils. These reforms have also had the effect of increasing local financial autonomy. Examples provided by our associations include: Bulgaria (reform in 2019), Moldova (reform in 2019), Portugal (reforms in 2013 and 2018), Slovakia (2020-2024: Real Estate tax reform) and Serbia (2020: Amendments to the Law on Property Taxes and the Law on Tax Procedure and Tax Administration).
As prescribed in the European Charter of Local Self-Government, Article 9 – Financial resources of local authorities: “Local authorities shall be entitled, within national economic policy, to adequate financial resources of their own, of which they may dispose freely within the framework of their powers”. The third paragraph of this Article clearly stipulates that “[At least part] of the financial resources of local authorities shall derive from local taxes and charges of which, within the limits of statute, they have the power to determine the rate”.
Local financial autonomy is therefore an important dimension of local autonomy and local governance. Regrettably, responses to our survey comparing LRG revenue sources, namely fiscal taxation or state allocations, revealed that, in the countries under study, state allocations from central governments in Europe still constitute, on average, 71.7% of the revenues of LRGs. Revenues from taxation accounted for only an average of 15.3% of LRG funding sources.[1]
Figure 4 – Local and regional government revenue: share of state allocation and subnational taxation
Average values:
Source: OECD-UCLG World Observatory on Subnational Government Finance and Investment
[1] OECD-UCLG World Observatory on Subnational Government Finance and Investment : http://www.sng-wofi.org