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Belgrade, November 01, 2006

Aut h or: Branislav Stipanović INTERGOVERNMENTAL FINANCE SYSTEM IN SERBIA - Status and next steps -. Belgrade, November 01, 2006. Legal Basis. LAW ON LOCAL GOVERNMENT FINANCING COMING INTO EFFECT : January 01 , 2007 Drafted in collaboration with : S CTM – for med “ Working group ”

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Belgrade, November 01, 2006

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  1. Author: Branislav StipanovićINTERGOVERNMENTAL FINANCE SYSTEM IN SERBIA -Status and next steps - Belgrade, November 01, 2006

  2. Legal Basis • LAW ON LOCAL GOVERNMENT FINANCING • COMING INTO EFFECT: January 01, 2007 • Drafted in collaboration with: • SCTM – formed “Working group” • SLGRP – DAI • GTZ • Nongovernmental Organizations

  3. In harmony with European Legislation • In harmony with solution presented in “EUROPEAN CHARTER ON LOCAL SELF-GOVERNMENT” • Council of Europe Recommendations • Best practices of other countries • Got excellent critiques from experts of: • Council of Europe • World Bank

  4. RESONS FOR ADOPTION OF THE NEW LAW • 2001-2005 – Intergovernmental finance system reform • Outcomes: • Realistic growth in local government revenues: revenues more than doubled • With no significant changes in responsibilities • 2004-2005 – Tax Reform: • Moving from sales tax to VAT • Elimination of pay roll tax • Increased share in wage tax + deficit transfer • Horizontal equalization – discrepancies brought from 16 times to 9.5 times

  5. BASIC GOALS • 4 BASIC GOALS: 1. Increased transparency, stability and predictability 2. Better horizontal equalization 3. Stronger local government autonomy 4. Institutionalized dialogue between central and local authorities

  6. 1. Increased transparency, stability and predictability of the system • Transfer pool – fixed percent of GDP (1,7%) • Types of transfers – defined and regulated by the Law • Criteria, distribution methodology (formula based)– defined by the Law

  7. 2. More efficient horizontal equalization system • Serbia – notable discrepancy in fiscal capacities • Goal- to allocate bigger transfers to fiscally poorer jurisdictions • Equalization – at 90% of the national average (shared taxes) • Reallocation – from fiscally richer jurisdictions to poorer ones ( Robin Hood method) • Discrepancies – brought down from 9.5 to 5.6 times

  8. 3. Stronger local government autonomy • Property tax – original tax • Introduced by ordinance • Rate set up to the ceiling proscribed by law • Local tax administration • Collection of all original revenues • Increase of amount and share of local government

  9. 4. Institutionalized dialogue between central and local authorities • Intergovernmental Finance Commission • Joint working body of the Government of RoS and local government units • 11 members – 5 representatives of ministries, 5 representatives of local government and chairman – who is appointed by the Government

  10. Role of the Commission • Analyzes intergovernmental finance system, vertical and horizontal balance of the system • Provides recommendations for changes and improvement of the system • Supervises the implementation of the Law and calculation of transfers for individual local government units

  11. Basic changes in the transfer system • Setting the total amount of transfer pool • Transfer pool – fixed percent of GDP • Base line was the existing amount of transfers (for 2006) = 1,175% • Increase to compensate for losses incurred when wage tax rate went from 14% to 12% • Total non earmarked transfer = 1,7% GDP

  12. Basic changes in the transfer system (2) • Introduction of several types of transfers: • Two basic groups: • Non earmarked transfers / unconditional • Earmarked transfers / conditional

  13. Basic changes in the transfer system(3) • Non earmarked transfers / unconditional: • Equalization • General • Compensation • Transitional • Reallocation – Robin Hood methodology

  14. NON EARMARKED TRANSFER • Equalization transfer: Who is receiving it: - <90% of national average (shared taxes); How much: - proportional to shortfall of jurisdictions

  15. NON EARMARKED TRANSFER(2) 2. General transfer: - Distributed to all local government units (LGs) - Criteria and Methodology defined by the Law - Each LG receives the same amount of funds per: - capita, - size, - number of classes in primary and secondary schools, - number of children in kindergartens, - number of facilities of primary and secondary education and child welfare

  16. General Transfer (2) • Scores – importance of each criteria: • 65% - number of inhabitants • 19,3% - size • 4,56% - number of classes in primary schools • 2,0% - number of classes in secondary education • 6,0% - number of children in kindergartens • 1,14% - number of facilities in primary education • 0,50% - number of facilities in secondary education • 1,5% - number of facilities in child welfare

  17. NON EARMARKED TRANSFER(3) 3. Compesantion transfer: - compensation of the share of revenues lost due to tax legislation changes; - of permanent nature - distributed only to those LGs which were not reimbursed for their losses in any other way

  18. NON EARMARKED TRANSFER(4) 4. Transitional transfer: - of temporary nature - goal: make transitional period easier (3 years) - during that period – compensation for loss in revenues ( share above 5%), occurred due to changes in transfer distribution system - dynamics – 2007=100%, 2008=50%, 2009=25% and 2010=0%

  19. NON EARMARKED TRANSFER(5) 5. Reallocation of transfers (Robin Hood methodology): - between fiscally richer and poorer jurisdictions - provides more efficient redistribution system

  20. Reallocation of transfers ( Robin Hood methodology) Who are the donors: • Average amount of shared taxes 50% (index 150) above the national average • This condition meet only Belgrade and Novi Sad How much: • 40% of funds above the proscribed amount of shared taxes (index 150) =2,6billion

  21. Robin Hood methodology (2) • Distribution: • according to criteria for distribution of general transfer Who is receiving it: - all LGs but the donor units

  22. EARMARKED TRANSFERS Reasons for introduction: • Financing functions and responsibilities Republic delegated to local government • Republic is able to finance concrete local government programs and projects

  23. EARMARKED TRANSFERS(2) Types of transfers: • Block- for financing particular functions such as: • Health care • Education • Social assistance... • Categorical in a narrower sense– for financing specific purpose within a function

  24. EARMARKED TRANSFERS(3) • The amount of transfers set by relevant ministries • During the Memorandum preparation procedure - relevant ministries submit to MoF: • Criteria and standards for setting the amount of transfers • Statistics • Amount of earmarked transfers for individual units

  25. NEXT STEPS • Non earmarked transfers are entirely regulated in terms of the way they are set and distributed – no particular problems in implementation • Implementation of EARMARKED transfers – practical solutions need to be fine tuned– which is the goal of this Program

  26. NEXT STEPS (2) • Determine the current status: • Which ministries are providing earmarked transfers • Types of transfers LGs are provided with • Methodologyfor setting the total amount of these transfers • Criteria and methodology for distribution of the transfers and their budget calendar • Planned amounts for 2006 and transferred amounts for the period January-October 2006

  27. NEXT STEPS (3) • Collect and analyze best practices from other countries • Propose efficient and transparent model for distribution of earmarked transfers • All interested stakeholders must be included in the Program : • Relevant ministries • Local government • Local and foreign experts

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