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1 Public Expenditure Conference Public Expenditure Conference Applying Subsidiarity Principle in the Transition Context: Lessons from South East Europe.

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Presentation on theme: "1 Public Expenditure Conference Public Expenditure Conference Applying Subsidiarity Principle in the Transition Context: Lessons from South East Europe."— Presentation transcript:

1 1 Public Expenditure Conference Public Expenditure Conference Applying Subsidiarity Principle in the Transition Context: Lessons from South East Europe to Guide the Diagnosis in BIH Sarajevo, March

2 2 Principle of Subsidiarity The general aim of the principle of subsidiarity is to guarantee a degree of independence for: lower authority in relation to a higher body local authority in respect of a central authority It involves the sharing of powers between several levels of authority

3 3 Principle of Subsidiarity Subsidiarity has three primary, generally accepted applications: Philosophical Legal Technical

4 4 Principle of Subsidiarity The idea of subsidiarity is entrenched in the process of European integration 1951: Article 5 of ECSC Treaty The Community should exert direct influence on production only when circumstances require it 1987: Article 130r EECT of Single European Act Subsidiarity criterion included, but not expressly defined 1988: Article 5 of European Charter of Local Self- Government Public responsibilities should be exercised by those authorities that are closest to the citizens 1992: Article 5 of Treaty on European Union

5 5 Principle of Subsidiarity Application of this principle has expanded into many areas: Economic Political Social Environmental

6 6 Principle of Subsidiarity Application of the principle to intergovernmental relations requires two strong pillars: Lowest denominator – municipality, canton, local government Highest denominator – power that can resolve problems that cannot be solved at the lower levels

7 7 Subsidiarity in the SAP Countries No explicit mentioning of subsidiarity in the SAP or accompanying CARDS Program Principle behind key objectives of SAP Democratic Stabilization Building the Institutions of the State Supporting Development of Civil Society and its Institutions Public Participation in Policy Debate and Accountability of Government Regional Cooperation and Key Sectors (e.g. Infrastructure)

8 8 Macroeconomic and Public Finance Aspects of Decentralization The concerns Decentralization of government functions raises challenges for macroeconomic control at the national level Local accountability involves the transfer of financial competencies, together with municipalities right to borrow Uncontrolled access to capital markets and mismanagement of budgets by local governments could destabilize the economy Decentralization and creditworthiness could be conflicting goals

9 9 Macroeconomic and Public Finance Aspects of Decentralization Trade-offs Local budgets typically subject to central control, monitoring preferable over direct control Central governments discharge own responsibilities to lower tiers: proper co-funding an issue Changes in state regulations, budget processes, social policies essential, predictability, however, a challenge for lower tiers

10 10 Building Blocks of Decentralization The Rules Expenditure and Revenue Assignment Local revenue is the cornerstone of fiscal decentralization, however, expenditure assignment has to precede revenue assignment Objectives of expenditure and revenue assignments National equity Efficiency of the internal common market Economies of administration and transaction costs –Grouping of congruent services at local, regional and national level

11 11 Building Blocks of Decentralization Criteria for Tax Assignment TaxAssignment Level Custom DutiesState VATState Corporate Income TaxState Sales TaxSub-national, above municipal Personal Income TaxAny level, e.g through surcharges Property TaxLocal government

12 12 Building Blocks of Decentralization Intergovernmental Transfers Whatever local system is established in a country, there will be a need for grant or revenue sharing because local expenditure needs typically tend to outstrip local resources Hence, design of a grants system is of a prime importance In general, intergovernmental transfers should be based on rules that are: Stable Transparent Non-arbitrary Universal Non-negotiable

13 13 Building Blocks of Decentralization Stabilizing Municipal Budgets and the Working of the Transfer System The grants/revenue-sharing system is sensitive to variations in the business cycle, with negative impact on the creditworthiness of municipal governments Therefore need for a stable source of revenue (e.g. property tax)

14 14 Building Blocks of Decentralization Municipal Debt Creditworthiness measured by the size of deficit of municipal budgets relative to their resource flow Recurrent spending very high in municipal budgets Borrowing for current expenditures to be avoided

15 15 The Preconditions

16 16 Essential Principles to Support the Building Blocks The Political Side

17 17 Essential Principles to Support the Building Blocks Finance Follows Function Strong Central Ability to Monitor and Evaluate Decentralization Transfers of Significant Taxing Power to Local Government Not Change the Rules Half Way Through Intergovernmental Transfer System to Match the Objectives of the Decentralization Hard Budget Constraint

18 18 There Must be a Champion for Fiscal Decentralization

19 19 There Must be a Champion for Fiscal Decentralization

20 20 There Must be a Champion for Fiscal Decentralization

21 21 Were do we Stand in Bosnia Policy Dimensions of the Reforms Significant progress has been made in reforming and harmonizing indirect tax policies through: Rationalizing exemption policies Lowering rates Broadening the tax base Harmonizing the point of indirect tax collection Similar reforms are now being designed for direct taxes, VAT is being considered as a replacement for the sales taxes Excessively high combined taxes on labor, including wage taxes and social contributions, have been nearly halved from their post- war highs of about percent of net wages The trade regime is now being further liberalized within the Stability Pact framework for South Eastern Europe

22 22 Were do we Stand in Bosnia Institutional Dimensions of the Reform Initial steps include the establishment of basic fiscal management capacity and the adoption of legal and institutional frameworks for budget and debt management system Promoting credibility, transparency and accountability in the public sector management has gained an increasing emphasis A major reform of the payments system has been introduced, involving the re-integration of key public resource management and control functions to those public institutions where the normally belong for the transparent and efficient operation of the public sector Initial tax administration reforms are also being broadened to improve cooperation between Entity tax administration systems and to effectively introduce anti-tax evasion and avoidance rules

23 23 Were do we Stand in South East Europe Looking forward The development of a sustainable fiscal stance will take place in all countries of South East Europe in a complex and evolving policy and institutional setting, with many uncertainties along the way If it is not well coordinated, well timed, and kept within the financial constraints, this process could aggravate the present fiscal fragilities Several critical issues will need priority attention concerning: Streamlining public administration Securing own-sourced financing for the State administration Formally coordinating public finance policies between the State and the Entities and within the Entities Developing mechanisms for balancing revenue and expenditure assignments between multi-tiered governments against development needs and the need for rationalizing the role of the public sector in the economy

24 24 Annex

25 25 BiH: Distribution of Municipalities

26 26 BiH: Sub-Entity Total Public Expenditure

27 27 FYR Macedonia: Distribution of Municipalities

28 28 Serbia and Montenegro: Distribution of Municipalities

29 29 THE END

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