The ninth edition of the NALAS fiscal decentralization report comprehensively examines the development of local finance in South-East Europe (SEE) from 2006 to 2021. It delves into recent regulatory changes and compares the performance of different economies concerning fiscal decentralization indicators. The report offers an in-depth analysis of intergovernmental fiscal relations in each of the SEE economies, as well as the revenue-raising capacities of local governments, identifying the significant developments and challenges encountered in the collection of local taxes, fees, and charges.
This edition places a heightened emphasis on the implications of the COVID-19 pandemic on municipal finances, encompassing legislative and volume perspectives, as well as the regulations and extent of municipal borrowing and local government debt in SEE. It is structured into four sections. The first section reviews the data used in the report and discusses fundamental methodological considerations. The second section presents the structure and functions of municipal governments in the region. The third section scrutinizes selected indicators of macroeconomic performance and fiscal decentralization, while the fourth section focuses on the evolution of intergovernmental finances in each SEE economy.
The report outlined the following findings and recommendations:
- The SEE region has a varying number of subnational levels of governance, ranging from one to three in different economies such as Bosnia and Herzegovina (BiH), Moldova, and Turkey.
- The trend in the SEE region follows the European pattern of people concentrating in capital and metropolitan cities. However, in some SEE economies including Albania, Serbia, North Macedonia, and Montenegro, the high percentage of the population residing in the capital cities is a cause for concern, reaching between 20% and 30%.
- Demographic changes in South-East Europe and the Western Balkans have been particularly challenging over the past decade. Based on Eurostat data from 2012 to 2021, the population of SEE increased by 5.7 million (4.4%).
- The COVID-19 pandemic has presented significant challenges for the SEE region, surpassing those of the 2008-2009 global financial and economic crisis. The economic downturn during the COVID-19 pandemic in 2020 led to a higher decline in real GDP rates compared to the global financial and economic crisis of 2008, except for Slovenia, Romania, and Serbia, which fared relatively well. The decline in economic activity due to the COVID-19 pandemic resulted in a significant decrease in public revenues for South-East Europe. In 2020, total general government (public) revenues fell by an average of 4% in annual terms in SEE.
- The decline in overall public revenues from the COVID-19 pandemic also impacted local government revenues, though to a lesser extent. The pandemic had a severe impact on the own revenues of local governments, with the collection of own taxes, fees, and charges falling by an average of 7% in SEE and 10% in the Western Balkans.
- Local government responsibilities vary across South-East Europe. Moldova and Kosovo have over 50% of the share in funding education, while in Bulgaria, Albania, Austria, Serbia, and Slovenia, it is equal to or close to 20%. In Turkey, the state directly funds the education system. The funding of these functions varies, with ‘own’ functions financed primarily by local government revenues, delegated functions by categorical grants, and shared functions by a mixture of the two.
- On average, EU economies have larger public sectors and have decentralized more revenue to local governments than their counterparts in SEE. Despite progress over the past decade, the public sector in SEE continues to lag far behind the EU average, with public revenues at 36.2% of GDP compared to the EU average of 46.9% of GDP in 2021.
- In 2021, local government revenue in SEE was 6.1% of GDP, whereas in the EU, it was 11.4% of GDP. There are wide differences and disparities in terms of financing local government services within South-East Europe, with significant variations in funding for local government services and wide gaps in per capita revenues among different countries.
- Over the last 15 years, local government revenues have increased in only about half of the economies in SEE. This trend is evident in Kosovo, North Macedonia, Austria, Albania, and Bulgaria, where local government revenues as a share of GDP have increased.
- Fiscal autonomy in SEE is declining, as local governments have less control over their budgets. On average, the share of local budgets under the full discretion of local authorities has decreased.
- The composition of local government’s own source revenues has changed significantly over the past 15 years. The share of property tax revenues has doubled in the Western Balkan economies, from an average of 14% to 28% of own-source revenues, indicating increased effort in property tax collection.
- Local government borrowing remains a relatively new and under-utilized instrument for financing local governments in most of the SEE region, accounting for only 2% to 4% of GDP in countries like Serbia, Austria, Turkey, Croatia, and Montenegro. Borrowing is negligible in Albania, North Macedonia, and Moldova, while in Slovenia, Romania, Serbia, Bulgaria, and the Federation of Bosnia and Herzegovina, it is more substantial. The main constraints for this financing include high levels of public debt, budget deficits, and the need to meet the Maastricht Treaty’s guidelines.
- Significant disparities exist across SEE local governments in their ability to use debt as a financing instrument for infrastructure and service improvement. Challenges include stringent regulations, high public debt levels, reduced budget credibility, and a lack of municipal capacities to engage successfully in lengthy and costly borrowing processes.
- During the COVID-19 pandemic, local government debt increased by 84% in the Western Balkans and 36% in South-East Europe.
- Local governments in the Western Balkans and South-East Europe manage between 10% and 25% of total public spending. Additionally, local government expenditure varies from 3% to 9% of the GDP, with averages of 5-6% of the GDP, which is about half of LG expenses in the EU.
- Local governments in the Western Balkans and South-East Europe spend about 24-25% of their budgets on capital expenditures for investments.
- WB6 and SEE local governments spend about 20-25% of total municipal budgets on general public services, about 24% on education, 16-19% on economic affairs, and about 14-15% on housing and community amenities. Municipal spending for health, social protection, and environmental protection varies between 3-5% each, in the WB6 and SEE.
- The infrastructure needs in SEE require increased spending levels, thus higher proportions of municipalities’ income should be invested in capital infrastructure. While spending for capital investment has increased in nominal terms, the share of municipal spending on capital investments has been declining over the past 16 years. Compared to 2006, the share of municipal spending for capital investments in SEE has decreased from 29% to 25%.
- There are wide disparities in the WB6 and SEE regions in the ability of local governments to spend on capital investments. On average, WB6 local governments spend about 77 Euro per capita on capital expenditures, while the average for SEE is 142 Euro per capita.
This publication was developed by NALAS, as a collaborative effort of the NALAS Fiscal Decentralization Task Force. Download the Report here: http://www.nalas.eu/ninth-edition-of-nalas-fiscal-decentralization-indicators-for-edition-south-east-europe/
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