www.pallai.hu The Hungarian LG System 1
KATALIN PALLAI
THE HUNGARIAN DECENTRALIZATION
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OUTLINE
The basic framework
Elements of the fiscal decentralization framework
Expenditure assignment
Revenue assignment
Borrowing
Design trade offs and problems in the system
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THE BASIC FRAMEWORK
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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 (1994-97)
Local expenditure 17,4 to 10,58 % of GDP (1990-2002)
Accountability
1990. Act on Local Governments
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SYSTEM OF PUBLIC ADMINISTRATION
CENTRAL GOVERNMENT and its organs at the local and terriotorial levels
LOCAL GOVERNMENTS at two levelsMunicipalities as basic units organized
by settlements
GENERAL OBLIGATIONGENERAL OBLIGATION
county governments (not EU regions)
RESIDUAL ROLERESIDUAL ROLE: services that settlements are not capable to perform or have a regional character
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EXPENDITURE ASSIGNMENT
WHO DOES WHAT?
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FUNCTIONS OF LOCAL GOVERNMENTSPhysical 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
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SERVICE TASKS OF LOCAL GOVERNMENTSOBLIGATORY 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
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LOCAL GOVERNMENT EXPENDITURES IN HUNGARY
1992 1997Education 33 36
Health 20 22
Social security and welfare 6 7
Housing and water 5 6
Transportation and communication
6 2
Current expenditures 79 74
Capital expenditures 19 17
Total expenditures 100 100
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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
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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
1993-97 new sectoral laws regulating service delivery and universal quality standards (in education basically output regulation)
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HEALTH CARE – hospitalsMixed 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
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REVENUE ASSIGNMENT
WHO LEVIES WHAT TAXES AND COLLECTS LOCAL
NON-TAX REVENUES?
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REAL VALUE OF REVENUES(on 1991 value)
050000
100000150000200000250000300000350000400000450000
1991.
1993.
1995.
1997.
1999.
2001.
TOTAL
transfers
own revenues
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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)
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Role of local taxes
0%2%
4%6%
8%10%
12%14%
16%
91 92 93 94 95 96 97 98 99 00
0%
20%
40%
60%
80%
100%
Share of local taxes inlocal governmentrevenues
Share of local businesstax in local taxes
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Local business tax revenue (per capita in 1998, thousand HUF)
49
31
13
0
10
20
30
40
50
Budapest Cities, towns Villages
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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
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LOCAL BORROWING
Who and How can Generate Local Debt?
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LOCAL BORROWINGBorrowing 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)
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PROBLEMS AND CONFLICTS IN THE
SYSTEM
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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
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GDP SHARE OF LG AND CG BUDGET
1991 1996 2000
CENTRAL GOVERNMENT
47% 40% 45%
LOCAL GOVERNMENTS
15% 14% 12%
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Local and Central budgets compared to the change of GDP
80
85
90
95
100
105
110
115
120
125
1992 1993 1994 1995 1996 1997 1998 1999
%
GDP
local governments
central government
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LOCAL REVENUES AS (%) SHARE OF GDP
10
11
12
13
14
15
16
17
18
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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
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Regulation of PIT sharing
0
10
20
30
40
50
60
PIT shares on theorigin bases
PIT sharesredistributed
PIT shares total toLG
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Shared PIT and local taxes(in nominal HUF)
0
50 000
100 000
150 000
200 000
250 0001991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Local taxes
Shared PIT (on originbases)
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OWN AND SHARED REVENUES
(AS SHARE OF TOTAL REVENUES)
05
1015202530354045
own revenues
shared on originbase
PIT to LGs
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TRANSFERS PROPORTIONAL TO TASKS
(AS SHARE OF TOTAL REVENUES)
0
10
20
30
40
50
60
1991
1993
1995
1997
1999
2001
normative grantsfor opeartion
investmentgrants
from PIT on taskbasis
total taskrelated transfers
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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
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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
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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
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IMPORTANCE OF LOCAL GOVERNMENTS
Division of monolithic state
New methods in governance
Participation and local democracy
POPULARITY OF LOCAL GOVERNMENTS
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Satisfaction with achievements
20
40
60
szept.97 may jún.99
national
local
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Satisfaction with institutions
0
10
20
30
40
50
60
1995 1996 1997 1998 1999
local governments
central government
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Role in improving your life
1996
1997
1998
1999
50
60
70
80
90
100
central government
parliament
mayor
local assembly
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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
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INSTITUTIONAL FRAMEWORK OF FDLegislative 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
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OWN REVENUES(as % of local budgets)
0%
10%
20%
30%
40%
50%
1995 1996 1997 1998 1999 2000
User charges
Local taxes
Revenue fromproperty
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Revenues in Budapest as % of total revenues
0
20
40
60
80
1001991.
1993.
1995.
1997.
1999.
2001.
own sourcerevenues
transfers