1. KATALIN PALLAI THE HUNGARIAN DECENTRALIZATION www.pallai.hu
The Hungarian LG System

2. The Hungarian LG System
OUTLINE
The basic framework
Elements of the fiscal decentralization framework
Expenditure assignment
Revenue assignment
Borrowing
Design trade offs and problems in the system
The Hungarian LG System

3. The Hungarian LG System
THE BASIC FRAMEWORK
The Hungarian LG System

4. 1990. Act on Local Governments
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 ( )
Local expenditure 17,4 to 10,58 % of GDP ( )
Accountability
The Hungarian LG System

5. SYSTEM OF PUBLIC ADMINISTRATION
CENTRAL GOVERNMENT and its organs at the local and terriotorial levels
LOCAL GOVERNMENTS at two levels
Municipalities as basic units organized by settlements
GENERAL OBLIGATION
county governments (not EU regions)
RESIDUAL ROLE: services that settlements are not capable to perform or have a regional character
The Hungarian LG System

6. EXPENDITURE ASSIGNMENT
WHO DOES WHAT?
The Hungarian LG System

7. FUNCTIONS OF LOCAL GOVERNMENTS
Physical 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
The Hungarian LG System

8. SERVICE TASKS OF LOCAL GOVERNMENTS
OBLIGATORY 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
The Hungarian LG System

9. LOCAL GOVERNMENT EXPENDITURES IN HUNGARY
1992
1997
Education 33 36
Health 20 22
Social security and welfare 6 7
Housing and water 5
Transportation and communication 2
Current expenditures 79 74
Capital expenditures 19 17
Total expenditures
100
The Hungarian LG System

10. 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
The Hungarian LG System

11. 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
new sectoral laws regulating service delivery and universal quality standards (in education basically output regulation)
The Hungarian LG System

12. HEALTH CARE – hospitals Mixed 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
The Hungarian LG System

13. WHO LEVIES WHAT TAXES AND COLLECTS LOCAL NON-TAX REVENUES?
REVENUE ASSIGNMENT
WHO LEVIES WHAT TAXES AND COLLECTS LOCAL NON-TAX REVENUES?
The Hungarian LG System

14. REAL VALUE OF REVENUES (on 1991 value)
The Hungarian LG System

15. The Hungarian LG System
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)
The Hungarian LG System

16. The Hungarian LG System
Role of local taxes
The Hungarian LG System

17. Local business tax revenue (per capita in 1998, thousand HUF)
The Hungarian LG System

18. 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
The Hungarian LG System

19. Who and How can Generate Local Debt?
LOCAL BORROWING
Who and How can Generate Local Debt?
The Hungarian LG System

20. The Hungarian LG System
LOCAL BORROWING
Borrowing 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)
The Hungarian LG System

21. PROBLEMS AND CONFLICTS IN THE SYSTEM
The Hungarian LG System

22. 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
The Hungarian LG System

23. GDP SHARE OF LG AND CG BUDGET
1991
1996
2000
CENTRAL GOVERNMENT
47%
40%
45%
LOCAL GOVERNMENTS
15%
14%
12%
The Hungarian LG System

24. Local and Central budgets compared to the change of GDP
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25. LOCAL REVENUES AS (%) SHARE OF GDP
The Hungarian LG System

26. PROBLEMS AND CONFLICTS IN THE SYSTEM
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
The Hungarian LG System

27. Regulation of PIT sharing
Gémesi György MDF-es képviselő a beszedett jövedelemadóból - a kormány 5 százalékos javaslatával szemben - 7,5 százalékot, a szocialisták alternatív költségvetési javaslatuk szerint 11,1 százalékot hagynának a települési önkormányzatoknál. Ezzel szemben három fideszes képviselő olyan módosító indítványt nyújtott be, amely szerint a települések lélekszámától függően degresszíven határoznák meg a helyben tartható szja-részt. Így az 500 lakos alatti települések a jövedelemadó-bevételek 15 százalékával gazdálkodhatnának, a 10 ezer fő alattiak 10 százalékot, az ennél nagyobbak 7 százalékot, a megyei jogú városok 5 százalékot kaphatnának. Kivétel lenne ez alól a főváros, amely a maradékot - vagyis az szja 5 százalékánál kisebb hányadot - kapná.
The Hungarian LG System

28. Shared PIT and local taxes (in nominal HUF)
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29. OWN AND SHARED REVENUES (AS SHARE OF TOTAL REVENUES)
The Hungarian LG System

30. TRANSFERS PROPORTIONAL TO TASKS (AS SHARE OF TOTAL REVENUES)
The Hungarian LG System

31. PROBLEMS AND CONFLICTS IN THE SYSTEM
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
The Hungarian LG System

32. PROBLEMS AND CONFLICTS IN THE SYSTEM
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
The Hungarian LG System

33. PROBLEMS AND CONFLICTS IN THE SYSTEM
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
The Hungarian LG System

34. IMPORTANCE OF LOCAL GOVERNMENTS
Division of monolithic state
New methods in governance
Participation and local democracy
POPULARITY OF LOCAL GOVERNMENTS
The Hungarian LG System

35. Satisfaction with achievements
The Hungarian LG System

36. Satisfaction with institutions
The Hungarian LG System

37. Role in improving your life
The Hungarian LG System

38. The Hungarian LG System
Thank you !
Katalin Pallai
The Hungarian LG System

39. 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
The Hungarian LG System

40. INSTITUTIONAL FRAMEWORK OF FD
Legislative 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
The Hungarian LG System

41. OWN REVENUES (as % of local budgets)
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42. Revenues in Budapest as % of total revenues
The Hungarian LG System