1 State grant systems with a special focus on Hungary Council of Europe Workshop Belgrade, 1 November, 2006 Gábor Péteri,

2 Grants and transfers: an outline 1.Intergovernmental fiscal architecture 2.Why transfers are needed? 3.Models and schemes 4.Allocation techniques in Hungary

3 Local expenditures in percentage of GDP

4 Size of local governments

5 Local revenues, Hungary (2005) Own current revenues:27% Own capital revenues:9% Shared taxes:16% Grants:29% Transfers:15% Loans:4% Total:100%

6 Why transfers are needed? Guarantee the minimum level of public services (vertical equalisation) Achieve efficient service provision Balance low revenue raising capacity But not for Supporting specific needs (above standard/average) Encouraging inefficient service provision

7 Objectives of transfers: efficiency and equalisation

8 Classification of transfers and grants 1. Types of grants: General purpose or specific/conditional Current and capital grants 2. Local autonomy in spending: Discretionary or mandatory/limited 3. Method of allocation: Formula based or arbitrary Mixed objectives => Parallel diverse methods

9 Basic models of grant allocation G calculated = Ei standard - Ri required Ri required Ei standardized 3. E & R capacity G normative RE=R+G normative 2. Control over transfers Ei estimates -Ri planned = Gi Ri planned Ei estimates 1. Control over E & R (gap filling) TransfersRevenuesExpendituresModels

10 Typical grant schemes in SEE 1.Gap filling: Moldova, Macedonia, Bulgaria (labour) 2. General grant: Albania, Croatia (in areas of special state concern), Macedonia, Serbia 3. Standardised method: Slovenia (expenditures), Albania (revenues), Serbia (revenues)

11 Allocation of local government transfers, Hungary

12 Shared and origin based PIT (Hungary)

13 Indicators for grant allocation Resident population (total, elderly) Lump sum per municipality Client/customer served Local tax on tourism collected (1:2) Administrative services (delegated) Services provided (liquid waste from septic tanks) Residents eligible for welfare payments Active population, not paying personal income tax

14 Transfers in education

15 Revenue equalisation 1.Scope: PIT and local business tax (LBT) 2.Averages: per capita by population size and administrative status 3.Standard rate: 70% of maximum LBT rate 4.Equalisation method: –below average => supplemented –above the average => deducted 5.Deduction is digressive, with built in breaks

16 Gap filling: deficit grant 1.Scale: 1.2% of grants, 1/3 of municipalities 2.Assessment of current spending needs: –Minimum population size (cooperation) –Required minimum capacity of schools –Limited increase of salaries –Expenditures are 90%-110% of national averages 3.Standardised revenues: –Collected local taxes: average LBT –User charges: increased by the inflation rate

17 Summary of grant allocation issues Scope of grants and transfers Composition of grants (diversity of objectives) Incentives created: E-R=G or G+R=E Assessment of expenditures: inputs or needs Estimation of revenue raising capacity Grant allocation methods: –Formula based or arbitrary –General or earmarked –Discretionary or conditional Planning process: predictability, transparency