Local Government and Finance: The Challenges of the 21st Century. Second Global Report on Decentralization and Local Democracy. GOLD II
This report analyzes the architecture of fiscal decentralization in one hundred and ten countries as well as in major metropolitan areas. In the majority of these countries, local authorities are taking on more and more responsibilities for public investment and the provision of services that are essential for both economic development and the well being of their citizens. If increasing fiscal decentralization has been a global trend in recent decades, there are significant variations across and within regions and countries. Local budgets make up on average 25% of public expenditure in the countries of the European Union but less than 5% in many developing countries. Decentralization in terms of revenue and expenditure autonomy has also increased, however this has been uneven across countries and has seen greater advances in expenditure than in revenues, where sources remain limited and uncertain, especially for small and middle size cities. With accelerating urbanization and important shifts in the global context (climate change, increasing risk of natural disaster, migration, and demographic changes among others), current funding levels are insufficient for local governments to respond to the urbanization of poverty, growing investment requirements and other pressing needs. The economic and financial crisis that began in 2008 only worsened the situation. This book identifies universal challenges facing local government finance, as well as those more regional and country specific. Some of the most common are inadequate sources of revenue, unpredictable transfers and grants, excessive higher-level budget controls, and unfunded mandates. In addition to analyzing these challenges and opportunities, the report proposes recommendations to strengthen the fiscal role and performance of local governments around the world.
The major challenge of local governments in the eight countries under review (Armenia, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, and Ukraine) over the past twenty years has been adjusting to the narrowing role and size of government, and the resulting reduction in local resources, while attempting to maintain the high quality of social services provided at the local level during the Soviet period.
During the last years, positive trends have been seen in some countries in the field of decentralization. In Armenia, the list of local taxes and duties was enlarged in 2010. In Ukraine, the concept of Local Government Reform was recently approved, and a new framework for local self-government legislation is currently being developed. In 2010, Belarus adopted a law on Local Government and Self-government.
However, in other countries, centralization tendencies are being observed: a reduced level of tax autonomy in Russia, Kyrgyzstan, and Georgia; a nomination of local self-government heads by the central government in Kyrgyzstan; the reorganization of local governments in Georgia; as well as limitations to expenditure autonomy of local governments in Russia.
The recent financial crisis has revealed weaknesses within the local finance system of some of the Eurasian countries, while in other countries local budgets seem to be doing better than central/regional ones due to their reliance on the most stable revenues sources.