LPSA Thematic Working Group on Subnational Finance – Open Meeting – November 2025

The 8th open meeting of LPSA’s Thematic Working Group on Subnational Finance took place on November 5, 2025. The session, moderated by Elton Stafa, Programme Director at NALAS and Co-Chair of the Working Group, focused on  fiscal decentralization trends in Europe, examining the current state of local government finance and multi-level governance across different regions. Discussions highlighted challenges in the Western Balkans, particularly the implementation gaps between legal frameworks and practical execution, as well as issues in North Macedonia related to local government structures and regional development. Participants explored potential solutions to improve coordination between central and local governments, emphasizing the need to enhance local fiscal autonomy and reduce dependency on central transfers through better-designed funding mechanisms and clearer tax competencies.

Marine Gaudron, from the Council of European Municipalities and Regions (CEMR), presented an overview of fiscal conditions for local governments across Europe, highlighting both emerging challenges and positive reform trends. She noted that fiscal conditions have worsened in many countries, with growing investment backlogs and rising fiscal deficits, particularly in countries such as Germany and Austria, while others, like Portugal, show signs of recovery. Across Europe, local governments are becoming increasingly dependent on transfers from central governments, with a growing share of earmarked transfers that limits fiscal autonomy. Marine also emphasized ongoing reforms in several countries, including Portugal, Croatia, Slovenia, and North Macedonia, which aim to strengthen local revenue generation and increase the share of local resources. She underscored a growing consensus that property tax represents a stable and sustainable revenue source for local governments. In addition, she outlined key megatrends shaping local finances — demographic change, digitalization, and the housing crisis — all of which place pressure on local budgets. In this part of the presentation, she concluded that local fiscal autonomy is declining across Europe due to an increase in conditional transfers, while demographic shifts create a “scissor effect”: growing demands for services and care for an aging population occur alongside a reducing tax base, especially impacting small rural municipalities.

Building on this, Marine discussed the European Commission’s proposal for the 2028–2034 EU budget , which represents around 1% of the EU’s GDP, noting that despite its small size, it plays a significant role in public and private investments, particularly through cohesion policy. Between 2014–2020, cohesion policy accounted for 13% of total EU public investments and nearly 50% in less-developed member states, highlighting its importance for local and regional development. Looking ahead, the EU’s long-term budget (2028–2034) introduces major structural changes. Traditional areas like cohesion and agriculture face cuts, while new priorities—competitiveness, security, and innovation—see increases. New EU revenue sources, including taxes on tobacco products, large corporations, and e-waste, may also impact local governments, particularly in waste collection. She concluded that the EU’s long-term investment policy faces uncertainty, with a shift toward competitive grants for innovation and industry, limited consultation with local and regional governments, and a risk of concentrating resources in already successful areas, particularly capital cities.

Monika Kurian, from the SIGMA Programme, presented the findings of the 2024 assessment of multi-level governance in Western Balkan administrations. She began by explaining SIGMA’s principles of public administration, which combine EU, OECD, and member country good practices into a common framework for reform, and highlighted that, for the first time, multi-level governance was explicitly included in the assessment. She outlined SIGMA’s six areas of focus—strategy and policy development, public service, human resource management, organizational accountability, service delivery, and public financial management—and explained how multi-level governance is embedded across these areas.

The assessment revealed that while Western Balkan countries have advanced legal frameworks in line with EU standards—scoring 83–90% on legislation, strategies, and institutional setup—the practical implementation of these frameworks is much lower, ranging from 32–55%, demonstrating a significant gap between law and practice. She observed that despite initial progress in decentralization around 2010, the pace has largely stalled, and local governments continue to lag behind EU peers in terms of autonomy, both in responsibilities and fiscal decentralization. While most municipalities are of an optimal size compared to EU averages, capacity differences persist, and local governments often face limitations in policy discretion, particularly in areas like education, social services, and local infrastructure.

Key gaps identified in the assessment include a narrow scope of competencies and responsibilities, fragmented and weak central supervision, limited coordination and consultation mechanisms between central and local administrations, insufficient use of intermunicipal cooperation practices, and weak merit-based recruitment and organizational autonomy in local administrations. Monika also highlighted that citizen trust in local governments is relatively low, between 30–40%, with around 50% expressing concern about excessive central government interference in local matters.

She concluded that while Western Balkan countries possess strong legal and institutional frameworks for multi-level governance, their practical implementation remains weak, local governments have fewer responsibilities compared to EU peers, and intermunicipal cooperation remains largely underutilized despite its potential to strengthen local capacities and service delivery.

Vesna Garvanlieva Andonova, from the Center for Economic Analyses, presented an overview of fiscal decentralization and regional development in North Macedonia. She outlined that the country operates a one-tier local government system, consisting of 80 municipalities and the city of Skopje, which itself includes 10 municipalities. Decentralization has been implemented in phases since 2004, initially through earmarked grants, with further reforms in 2007 and 2011. While municipalities have formally assigned responsibilities, central government retains significant policy authority, and sectoral coordination remains limited.

Local government budgets account for approximately 5% of GDP, comparable to regional peers but below EU levels. Vesna highlighted that municipalities are highly dependent on central transfers, which constitute around two-thirds of their revenues, with own-source revenues averaging only about 22% at the median. Recent reforms have doubled the share of personal income tax allocated to municipalities and introduced equalization and performance-based components to VAT transfers; however, these changes are largely cosmetic and do not constitute systemic reform.

Persistent regional disparities were emphasized, with Skopje’s GDP being nine times higher than the Northeast region and per capita GDP 2.5 times higher. Smaller and rural municipalities face limited fiscal capacity, difficulties in maintaining assets, and challenges in providing essential services. Vesna noted that decentralization in North Macedonia has been driven more by political considerations and national cohesion than by economic efficiency. Efforts to increase fiscal autonomy, improve capital transfers, and enhance performance-based budgeting remain stalled, while regional development initiatives, though legally mandated, are under-executed.

Overall, North Macedonia’s decentralization reflects more deconcentration than genuine devolution of fiscal authority, leaving municipalities with limited autonomy, persistent fiscal stress, and ongoing regional inequalities.

Fran Brahimi, Director of Local Finance at Albania’s Ministry of Finance, provided a central government perspective on fiscal decentralization challenges in the Western Balkans.He emphasized that financial autonomy is essential for local governments; without it, they risk becoming extensions of central government agencies. While legal frameworks and strategies for local governance exist across the region, their implementation is often weak, with only 50–55% of planned measures effectively applied.

Fran compared local government expenditure and revenue levels across regions. In developed European countries, local governments spend about 10–12% of GDP, while in Eastern Europe it averages 6–7%, and in the Western Balkans it is lower, around 5%, with Albania at just 3.5% of GDP. Similarly, local revenues remain low, limiting the ability of municipalities to perform assigned functions.

He highlighted weak cooperation between central and local governments as a systemic challenge, noting that responsibilities are sometimes transferred to municipalities without adequate resources or support. Fran suggested that the European Union could play a stronger role by establishing benchmarks for local government finances (e.g., 6% of GDP for local expenditure, 2–3% of GDP for local revenues) to guide accession countries.

In Albania, efforts are underway to revise the financial mechanisms for local governments through the public financial management strategy. Initiatives include improving the budgeting process, promoting democratization of local budgeting, refining local tax and fee administration, and leveraging digitalization to enhance efficiency. Fran also recommended creating a dedicated legal framework to strengthen central-local coordination, ensuring clarity in competencies and financial responsibilities.

In conclusion, he stressed that key challenges across the Western Balkans include low fiscal autonomy, limited implementation of legal frameworks, and weak central-local coordination. Strengthened EU guidance, clear financial benchmarks, and dedicated legal mechanisms could support more effective fiscal decentralization and empower local governments to fulfill their functions.

During the Q&A session, several critical issues were raised around the challenges of reducing local government dependency on central transfers. Participants discussed the tension between assigning extensive social service responsibilities to municipalities and the resulting need for higher transfers from central governments. Questions focused on how transfers could be better structured to provide autonomy while ensuring equitable funding, and how local governments could strengthen their own-source revenues through measures such as property tax reform and improved tax collection.

In conclusion, the conversation addressed the challenges and opportunities for enhancing local government financial autonomy, emphasizing that while dependence on transfers is inevitable for social service provision, key solutions lie in establishing well-designed, flexible transfers and diverse local revenue streams . Ultimately, strategic reforms like property tax reformand improved tax collectionare crucial for increasing local own-source revenues and strengthening financial independence.Bottom of Form

A video of the meeting is available on YouTube. The links below provide access to the video segments of the different agenda items.

We need your help to make this meeting a success: If you have any updates about fiscal decentralization or subnational financial management in your country; updates about new research; or information about multilevel government finance and intergovernmental fiscal relations that you would like to mention during the open meeting, please email the Working Group co-chairs at finance@decentralization.net. so that a brief announcement can be made at the beginning of the meeting.

Reminder: You can join any LPSA Expert Working Group free of cost and receive reminders and updates by opting-in to one or more working groups as part of your LPSA Membership registration.