Www.pallai.huThe Hungarian LG System1 KATALIN PALLAI THE HUNGARIAN DECENTRALIZATION.

www.pallai.hu The Hungarian LG System 1

KATALIN PALLAI

THE HUNGARIAN DECENTRALIZATION


OUTLINE

The basic framework

Elements of the fiscal decentralization framework

Expenditure assignment

Revenue assignment

Borrowing

Design trade offs and problems in the system


THE BASIC FRAMEWORK


The system created on the model of the European Charter of Local Governments

on the principles of Subsidiarity

Independent self-government

Local government decision can be attacked only at court or Constitutional Court on the basis of its legality

Strong decentralization

Two main frameworks of public administration (CG&LGs)

Public expenditure 54 to 39 % of GDP (1994-97)

Local expenditure 17,4 to 10,58 % of GDP (1990-2002)

Accountability

1990. Act on Local Governments


SYSTEM OF PUBLIC ADMINISTRATION

CENTRAL GOVERNMENT and its organs at the local and terriotorial levels

LOCAL GOVERNMENTS at two levelsMunicipalities as basic units organized

by settlements

GENERAL OBLIGATIONGENERAL OBLIGATION

county governments (not EU regions)

RESIDUAL ROLERESIDUAL ROLE: services that settlements are not capable to perform or have a regional character


EXPENDITURE ASSIGNMENT

WHO DOES WHAT?


FUNCTIONS OF LOCAL GOVERNMENTSPhysical Services

Transport

Public Works

Social services

Education and Culture

Welfare and Health Care

Public Administration and local management

Urban regulation and planning

Protection of the natural and built environment

Citizens’ administration (birth, death, marriage)

Local business and Tax administration

Asset management


SERVICE TASKS OF LOCAL GOVERNMENTSOBLIGATORY TASKS

Drinking water

Basic health and welfare services

Kindergarten and primary school education

Public roAds & lighting

Cemeteries

Protection of the rights of minorities

OPTIONAL TASKS

Depending on size and financial capacities

Only on extent not endangering delivery of the mandatory tasks

Fire brigades&rescue

Welfare services

Public transportation

Secondary education


LOCAL GOVERNMENT EXPENDITURES IN HUNGARY

1992 1997Education 33 36

Health 20 22

Social security and welfare 6 7

Housing and water 5 6

Transportation and communication

6 2

Current expenditures 79 74

Capital expenditures 19 17

Total expenditures 100 100


PHYSICAL INFRASTRUCTURE SERVICES (own responsibilities)

Gas, district heating, water, waste, local public transport, cemeteries, etc

TRANSFER TO LGs:Responsibility as compulsory task to local

governments

1991. Law on property transfer as core assets (actual transfer till 1993)

1994. Price setting authority transferred (except for gas, and veto right of CG on public transport charges)

Revenue collection and receipt

Investment grants and operation subsidy available

Freedom how to organize the service delivery


HUMAN SECTOR SERVICES,except health (shared responsibilities)

PRIMARY AND SECONDARY EDUCATION TRANSFERRED TO LGs:

Responsibility as compulsory task to local governments

1991. Law on property transfer of assets used by the institutions (actual transfer till 1993)

Employer rights of staff involved

Normative grants on the basis of tasks supplied

Investment grants on request

General revenues to supplement grants

1993-97 new sectoral laws regulating service delivery and universal quality standards (in education basically output regulation)


HEALTH CARE – hospitalsMixed system (not shared !)

National level - financing of operations

Specification of financing rules for activities

Operation contract as basis for transfers

Specification of type and amount of services to be covered (and up-dated every year)

Local level - capital investments

Construction and renovation of buildings

Purchase of equipment

Competition for national grant system

Producing dubious incentives


REVENUE ASSIGNMENT

WHO LEVIES WHAT TAXES AND COLLECTS LOCAL

NON-TAX REVENUES?


REAL VALUE OF REVENUES(on 1991 value)

050000

100000150000200000250000300000350000400000450000

1991.

1993.

1995.

1997.

1999.

2001.

TOTAL

transfers

own revenues


LOCAL REVENUES

Annual revenue transfers

Shared revenues

Normative operational grants

Addressed and targeted investment grants

Deficit grant

Own-source revenues:

Local taxes

Fees, charges, contributions

Revenues on Property (Lease and sale)

Borrowing (loan and bond)


Role of local taxes

0%2%

4%6%

8%10%

12%14%

16%

91 92 93 94 95 96 97 98 99 00

0%

20%

40%

60%

80%

100%

Share of local taxes inlocal governmentrevenues

Share of local businesstax in local taxes


Local business tax revenue (per capita in 1998, thousand HUF)

49

31

13

0

10

20

30

40

50

Budapest Cities, towns Villages


Basically normative system

Proportional to tasks

Normative grants for operation

Addressed and targeted investments grants

Revenue localization

Own revenue – tax, fee, privatization, property lease and sale

Shared taxes

Revenue capacity

Different forms of operation and development subsidies

Equalization grant, based on local tax and PIT capacity calculation


LOCAL BORROWING

Who and How can Generate Local Debt?


LOCAL BORROWINGBorrowing is an independent decision of

the local council, mayor, financial chief

Macro-economic risks of local Borrowing is reduced by Laws and regulations

Regulation of Municipal borrowing (debt service pegged to own current revenues ‘96)

Municipal bankruptcy and Debt Settlement Procedure (‘96)

Law: Central Government is not responsible for local borrowing (no bail-out)


PROBLEMS AND CONFLICTS IN THE

SYSTEM


PROBLEMS AND CONFLICTS IN THE SYSTEM

Lack of predictability:Annual decisions of central transfers within

the State Budget

flexibility for central Government vs. Insecurity for Local Governments and Overwhelming fiscal dependency

Structural deficit of the national budget:

Central government strategy can „push down” the deficit to the LG level


GDP SHARE OF LG AND CG BUDGET

1991 1996 2000

CENTRAL GOVERNMENT

47% 40% 45%

LOCAL GOVERNMENTS

15% 14% 12%


Local and Central budgets compared to the change of GDP

80

85

90

95

100

105

110

115

120

125

1992 1993 1994 1995 1996 1997 1998 1999

%

GDP

local governments

central government


LOCAL REVENUES AS (%) SHARE OF GDP

10

11

12

13

14

15

16

17

18



Decreasing local government revenues:The possible problems:

Un-predictable process, insecurity for LG planning

Inadequacy of LG funding

Interest of local governments:

Predictable system: to peg transfer pool to GDP or National Budget

More own revenues and financial independence (CG must offer not only right, but make also room for local revenue collection)

Better representation of the interests of LGs


Regulation of PIT sharing

0

10

20

30

40

50

60

PIT shares on theorigin bases

PIT sharesredistributed

PIT shares total toLG


Shared PIT and local taxes(in nominal HUF)

0

50 000

100 000

150 000

200 000

250 0001991

1992

1993

1994

1995

1996

1997

1998

1999

2000

Local taxes

Shared PIT (on originbases)


OWN AND SHARED REVENUES

(AS SHARE OF TOTAL REVENUES)

05

1015202530354045

own revenues

shared on originbase

PIT to LGs


TRANSFERS PROPORTIONAL TO TASKS

(AS SHARE OF TOTAL REVENUES)

0

10

20

30

40

50

60

1991

1993

1995

1997

1999

2001

normative grantsfor opeartion

investmentgrants

from PIT on taskbasis

total taskrelated transfers



Weaknesses of the normativity of the intergovernmental financing system

Decreasing task related financing

Shared tax revenue has decreased

Inadequacy of the own revenue sources

Revenue capacity calculation for equalization considerably decreased the incentive for own revenue production

No calculation of revenue dynamics

Increase of discretionary elements



Difficulties caused by the Public Sector Reform

Uniform quality standards:

changing tasks for local governments

Un-funded mandates ?

Sector policies vs. Inter-sectoral bargains

Central planning advantage vs. micro adjustments and synergies of local policies



Fragmentation

In 1990 it was logical to create a system based on the settlement level for reinforcement of communities and participation

Differences in capabilities

Externalities and economy of scale

Certain functions shifted to weak middle level

Incentives to cooperation of LGs

Privatization and out sourcing encouraged


IMPORTANCE OF LOCAL GOVERNMENTS

Division of monolithic state

New methods in governance

Participation and local democracy

POPULARITY OF LOCAL GOVERNMENTS


Satisfaction with achievements

20

40

60

szept.97 may jún.99

national

local


Satisfaction with institutions

0

10

20

30

40

50

60

1995 1996 1997 1998 1999

local governments

central government


Role in improving your life

1996

1997

1998

1999

50

60

70

80

90

100

central government

parliament

mayor

local assembly


Katalin Pallaiwww.pallai.hu

[email protected]


RIGHTS OF LOCAL GOVERNMENTS

LGs autonomously act on public affairs in local interests

Responsibility and authority exercised by elected body

The office has strictly administrative and preparatory tasks

Autonomously select the mix and forms of services delivered

Autonomous decision on organization and rules of procedure


INSTITUTIONAL FRAMEWORK OF FDLegislative Framework: Constitution, Local

Government Act, Act on Local Budgets, State Budget Act, Sector Laws and Decrees, Act on Municipal Debt Resolution

Organizational Framework for Conflict Resolution

Surveillance: Parliament, State Audit Office, Local Administrative Notary, sector ministries (compliance with sector rules)

Citizens’ control: transparency, public hearing, referendum, polls, NGOs & private sector representation

Dispute resolution: regular Courts, Constitutional Court, No Administrative Court only departments of judges specialized on administrative cases


OWN REVENUES(as % of local budgets)

0%

10%

20%

30%

40%

50%

1995 1996 1997 1998 1999 2000

User charges

Local taxes

Revenue fromproperty


Revenues in Budapest as % of total revenues

0

20

40

60

80

1001991.

1993.

1995.

1997.

1999.

2001.

own sourcerevenues

transfers

Www.pallai.huThe Hungarian LG System1 KATALIN PALLAI THE HUNGARIAN DECENTRALIZATION.

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