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

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

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

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. 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. 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. 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. 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. Building Blocks of Decentralization
Criteria for Tax Assignment
Tax
Assignment Level
Custom Duties
State
VAT
Corporate Income Tax
Sales Tax
Sub-national, above municipal
Personal Income Tax
Any level, e.g through surcharges
Property Tax
Local government

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. 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. 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. The Preconditions

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

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. There Must be a Champion for Fiscal Decentralization

19. There Must be a Champion for Fiscal Decentralization

20. There Must be a Champion for Fiscal Decentralization

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. 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. 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. Annex

25. BiH: Distribution of Municipalities

26. BiH: Sub-Entity Total Public Expenditure

27. FYR Macedonia: Distribution of Municipalities

28. Serbia and Montenegro: Distribution of Municipalities

29. THE END