Belgrade, November 01, 2006

Author: Branislav Stipanović

INTERGOVERNMENTAL FINANCE SYSTEM IN SERBIA

- Status and next steps -

Belgrade, November 01, 2006

Legal Basis

• LAW ON LOCAL GOVERNMENT FINANCING

• COMING INTO EFFECT: January 01, 2007

• Drafted in collaboration with:– SCTM – formed “Working group”

– SLGRP – DAI

– GTZ

– Nongovernmental Organizations

In harmony with European Legislation

• In harmony with solution presented in “EUROPEAN CHARTER ON LOCAL SELF-GOVERNMENT”

• Council of Europe Recommendations

• Best practices of other countries

• Got excellent critiques from experts of:– Council of Europe– World Bank

RESONS FOR ADOPTION OF THE NEW LAW

• 2001-2005 – Intergovernmental finance system reform

• Outcomes:– Realistic growth in local government revenues:

revenues more than doubled – With no significant changes in responsibilities – 2004-2005 – Tax Reform:

• Moving from sales tax to VAT• Elimination of pay roll tax • Increased share in wage tax + deficit transfer

– Horizontal equalization – discrepancies brought from 16 times to 9.5 times

BASIC GOALS

• 4 BASIC GOALS: 1. Increased transparency, stability and

predictability

2. Better horizontal equalization

3. Stronger local government autonomy

4. Institutionalized dialogue between central and local authorities

1. Increased transparency, stability and predictability of the system

• Transfer pool – fixed percent of GDP (1,7%)

• Types of transfers – defined and regulated by the Law

• Criteria, distribution methodology (formula based)– defined by the Law

2. More efficient horizontal equalization system

• Serbia – notable discrepancy in fiscal capacities • Goal- to allocate bigger transfers to fiscally

poorer jurisdictions• Equalization – at 90% of the national average

(shared taxes)• Reallocation – from fiscally richer jurisdictions to

poorer ones ( Robin Hood method)• Discrepancies – brought down from 9.5 to 5.6

times

3. Stronger local government autonomy

• Property tax – original tax – Introduced by ordinance – Rate set up to the ceiling proscribed by law

• Local tax administration – Collection of all original revenues

• Increase of amount and share of local government

4. Institutionalized dialogue between central and local

authorities

• Intergovernmental Finance Commission– Joint working body of the Government of RoS

and local government units– 11 members – 5 representatives of ministries,

5 representatives of local government and chairman – who is appointed by the Government

Role of the Commission

• Analyzes intergovernmental finance system, vertical and horizontal balance of the system

• Provides recommendations for changes and improvement of the system

• Supervises the implementation of the Law and calculation of transfers for individual local government units

Basic changes in the transfer system

• Setting the total amount of transfer pool – Transfer pool – fixed percent of GDP – Base line was the existing amount of transfers

(for 2006) = 1,175%– Increase to compensate for losses incurred

when wage tax rate went from 14% to 12% – Total non earmarked transfer = 1,7% GDP

• Introduction of several types of transfers:– Two basic groups:

1. Non earmarked transfers / unconditional

2. Earmarked transfers / conditional

Basic changes in the transfer system (2)

Basic changes in the transfer system(3)

• Non earmarked transfers / unconditional:

1. Equalization

2. General

3. Compensation

4. Transitional

5. Reallocation – Robin Hood methodology

NON EARMARKED TRANSFER

1. Equalization transfer:

Who is receiving it:

- <90% of national average (shared taxes);

How much:

- proportional to shortfall of jurisdictions

NON EARMARKED TRANSFER(2)

2. General transfer:- Distributed to all local government units (LGs)

- Criteria and Methodology defined by the Law - Each LG receives the same amount of funds per: - capita, - size, - number of classes in primary and secondary schools, - number of children in kindergartens, - number of facilities of primary and secondary education and child

welfare

General Transfer (2)

• Scores – importance of each criteria:– 65% - number of inhabitants – 19,3% - size – 4,56% - number of classes in primary schools – 2,0% - number of classes in secondary education – 6,0% - number of children in kindergartens – 1,14% - number of facilities in primary education – 0,50% - number of facilities in secondary education – 1,5% - number of facilities in child welfare

NON EARMARKED TRANSFER(3)

3. Compesantion transfer:

- compensation of the share of revenues lost due to tax legislation changes;

- of permanent nature

- distributed only to those LGs which were not reimbursed for their losses in any other way

NON EARMARKED TRANSFER(4)

4. Transitional transfer:

- of temporary nature

- goal: make transitional period easier (3 years)

- during that period – compensation for loss in revenues ( share above 5%), occurred due to changes in transfer distribution system

- dynamics – 2007=100%, 2008=50%, 2009=25%

and 2010=0%

NON EARMARKED TRANSFER(5)

5. Reallocation of transfers (Robin Hood methodology):

- between fiscally richer and poorer jurisdictions

- provides more efficient redistribution system

Reallocation of transfers ( Robin Hood methodology)

Who are the donors:– Average amount of shared taxes 50% (index

150) above the national average – This condition meet only Belgrade and Novi

Sad

How much:– 40% of funds above the proscribed amount of

shared taxes (index 150) = 2,6 billion

Robin Hood methodology (2)

• Distribution:– according to criteria for distribution of general

transfer

Who is receiving it:

- all LGs but the donor units

EARMARKED TRANSFERS

Reasons for introduction:- Financing functions and responsibilities

Republic delegated to local government - Republic is able to finance concrete local

government programs and projects

EARMARKED TRANSFERS(2)

Types of transfers:1. Block- for financing particular functions

such as:• Health care • Education• Social assistance...

2. Categorical in a narrower sense– for financing specific purpose within a function

EARMARKED TRANSFERS(3)

– The amount of transfers set by relevant ministries

– During the Memorandum preparation procedure - relevant ministries submit to MoF:

• Criteria and standards for setting the amount of transfers

• Statistics • Amount of earmarked transfers for individual units

NEXT STEPS

• Non earmarked transfers are entirely regulated in terms of the way they are set and distributed – no particular problems in implementation

• Implementation of EARMARKED transfers – practical solutions need to be fine tuned– which is the goal of this Program

NEXT STEPS (2)

• Determine the current status:– Which ministries are providing earmarked

transfers– Types of transfers LGs are provided with – Methodology for setting the total amount of

these transfers – Criteria and methodology for distribution of

the transfers and their budget calendar– Planned amounts for 2006 and transferred

amounts for the period January-October 2006

NEXT STEPS (3)

• Collect and analyze best practices from other countries

• Propose efficient and transparent model for distribution of earmarked transfers

• All interested stakeholders must be included in the Program :– Relevant ministries – Local government – Local and foreign experts