Scientific Papers (www.scientificpapers.org) Journal of Knowledge Management, Economics and Information Technology 1 Vol. V, Issue 6 December 2015 Romania-Between Decentralization and Deconcentration Author: Constantinescu Carmen Maria, The Bucharest University of Economic Studies, [email protected]The present paper studies the level of local financial autonomy in our country, in relation to the capacity of local communities to make public expenditures. Our own local targets Revenues analysis and main components, discussing the impact Transfers and subsidies that May have on the degree of local financial Decentralization, as they are Considered own Revenues or not. According to the results of our research, Romania's present time reached only the stage of deconcentration, Because Of Two Reasons: poor local financial Decision independence and Reduced and unproportional economic development. Keywords: Financial Decentralization, Hunter's index, own Revenues, deconcentration, public Transfers and subsidies. JEL Classification: H72 Introduction After 1990, democracy system implementation in Romania gave to local communities new responsibilities, especially in the management of public affairs of the town or of the county, due to the need of compatibility with the situation in European public administration. Thus, in our country have developed a series of regulations that targeted financial and decisional decentralization of public services by local government, most often unsuccessful due to lack of local institutional capacity to effectively manage
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Scientific Papers (www.scientificpapers.org) Journal of Knowledge Management, Economics and Information Technology
1
Vol. V, Issue 6 December 2015
Romania-Between Decentralization and
Deconcentration
Author: Constantinescu Carmen Maria, The Bucharest University
Rondinelli et al. (1983)), enhancing citizen access to public services by
community right ( and obligation) to participate to the decision-making
process and its implementation. The theory of fiscal federalism (Musgraves
(1959), Oates (1972)) emphasizes that folding taxation and public spending
on taxpayer’ needs and capacity increases the individual welfare, which
represents the objective of public finances.
1 Uchimura, H., Jütting, J. P. (2009). Fiscal Decentralization, Chinese Style: Good for Health Outcomes?,World Development, Elsevier, vol.37(12);
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The financial decentralization is extremely delicate and complex,
having as determinants central and local government quality, the quality of
democracy, the size of the country the homogeneity of preferences strongly
manifests as country is smaller and financial decentralization no longer
serves any purpose), and income differences between localities or regions,
full amounts of per capita amounts (larger discrepancies involves central
government intervention by public money redistribution, so
decentralization is no longer attractive to rich areas)2 . Also, the level of
urbanization and the diversity of ethnic groups have a significant impact, as
the different cultural population generates a diversification of the range of
preferences.
The financial decentralization refers to the local government right
to collect own revenues according their specific needs. In the same time,
financial decentralization requires freedom of selection of targets local
revenues to be directed to, meaning free destinations and unrestricted local
public spending (respecting, of course, local budget capacity). So,
decentralization can be studied in terms of local public income and the
independence and flexibility in selecting and setting them according to
community’s financial capacity, but also through the local public expenses
and the freedom to choose between investment or consumption objectives
(and their typology in terms of public services), according to own local
specific needs.
The degree of authority, accountability and financial resources
redistribution, necessary to provide public services at different levels of
government decentralization offers three distinct manifestations:
devolution, delegation and deconcentration3.
Devolution is a bottom-up process (bottom-up), that suppose that
the local government is constitutionally entitled to manage permanently its
business, that including the possibility of introducing or
increasing/decreasing local tax and fees and to establish local public
expenses destinations and the amounts allocated on each of these, of course,
with limited interference from the government. The process involves almost
2Thießen, U. (2000). Fiscal Federalism in Western European and Selected Other Countries: Centralization or Decentralization? What Is Better for Economic Growth?, Discussion Papers of DIW Berlin 224, DIW Berlin, German Institute for Economic Research; 3 Vazquez, J., McNab, R. (1997). Fiscal Decentralization, Economic Growth, and Democratic Governance, International Studies Program Working Paper Series, at AYSPS, GSU paper 9707, International Studies Program, Andrew Young School of Policy Studies, Georgia State University;
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entirely the transfer of authority in terms of management decisions from
general government generally to autonomous local authorities and the state
involves on local public affairs only by general regulations. This type of
decentralization is specific to federal states.
Delegation is a top-down process (top to bottom), which implies
that the state gives to local governments executive powers and the right to
adjust the local public resources in accordance with the delegated functions
but with certain and explicit rules that can later be changed or revoked by
the central government. Although we can identify some decisional freedom,
local government actions are controlled by central government, which also
assures a by specific financial mechanism a part of financial resources that
local administrative units need to cover the expenses associated to own
decided or delegated local public tasks. This type of decentralization is
specific to unitary states.
Deconcentration is the least representative form of decentralization.
This kind of system is followed more by centralized forms of government, in
order to increase efficiency and flexibility in the provision of goods and
services by central government through local offices. Characterized as the
early stage of decentralization, the deconcentration of decision-making
power transforms local governments in executants, because they receive
target allocated resources and fully complies to central decisions.
Both delegation and devolution can produce favorable results
through efficient allocation of resources, but the differences are in terms of
interests served. Thus, the delegated systems serve the national interest
meanwhile the devolution prevails local interest in equilibrium with the
national one 4.
However, any of these methods is used, it enables local and regional
economic development, corruption decreasing, social welfare increasing,
local budget balance deficit and democratic governance5
. The
decentralization process, recognized as the act through government is
brought closer to the citizen, strengths local autonomy, allowing local
communities define their own rules of action and to choose own means of
intervention in public affairs, according to their specific needs and financial
4 Bird, R.,Vaillancourt, F. (1997). Fiscal decentralization in developing countries: an overview and perpectives, paper prepared for the International Seminar in Public Economics, Tokyo; 5 Constantinescu, C., Mosteanu, T. (2011). The decentralization of public finance. The context-effect relationship,The economic Review no. 6(59), Sibiu, 2011;
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power. This way, the local management act is properly, efficiently, timely
and realized in cost-saving conditions6.
Methodology of research
In this paper we analyzed local public revenues and expenditures from 2006
to 2013 timeframe, especially looking for local public decentralized service
funding sources and administrative units’ capacity to face their own decided
and delegated expenditure by own resources or transferred ones from state
budget. We also submitted for discussion the legislation which is regulating
local public finances, highlighting various aspects of the local funding,
respectively of the degree of financial independence and decision-making.
The results of both studies, combined, allowed us to formulate a conclusion
about the financial decentralization in our country.
Research results
Legislative gaps
Romania's transition from centralized to decentralized system had and still
has many obstacles generated by poor regulation. Central public
administration passed the responsibility for numerous local public services
to local public administrations and the transfer of responsibility has been
accompanied by transfers of public money which meant to help local
governments to face new public spending induced. The first Law on Local
public Finance No. 189/1998 represents a fundamental step in terms of
winning local financial autonomy. Subsequently, the Law of Public Finance
no. 273/2006 completed the first rules in the local public domain and
progress was obviously because there have been introduced clear rules for
the distribution of budget balance transfers. Unfortunately, even after the
changes made in 2010, the transfers which finance the delegated public
services still miss distribution regulations. The shares from value added tax
are allocated respecting the annual budget laws to some public services
which are better provided at local level, as child protection, persons with
disabilities’ assistance, various school programs with the objective of
6 Mosteanu,T., Lacatus, C. (2009). Romanian Local Public Finance Decentralization, Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol.12;
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encouraging healthy eating, public population record institutions,
decentralized cultural institutions, special education and educational
assistance, nurseries, social aid for house heating, school education etc. If
state budget law exactly establishes the amounts of public money allocated
separately to child protection and to assistance to disabled persons, for all
the other cases is specified a general amount of money, covering a sum of
delegated public services. This situation provide to local public
administration the freedom to allocate the respective amounts in discretion
terms between any fields required by law, without certain rules. So, the main
objective is not to allocate efficiently, to the areas which really need funding,
but to spend the transfers on a least one of the fields specified.
Unfortunately, there is a strong heterogeneity between areas set as
destination of these public transfers, so the substitution in financing a
public service to others cannot bring the benefits of the interchangeable
public policies generally do.
The distribution of the amounts deducted from the added value tax
which support delegated public services needs priority to take into account
the subjective situation and specific needs of each community.
Unfortunately, in this regard, the law gives no explanation, so we conclude
that the allocation of transfers is according to criteria more or less
subjective, most likely political. However, imbalances between territorial
administrative units are imminent because of subjectivity in public needs
financial evaluation. We think there is an urgent need to establish by law
methods and criteria for basing the judicious expenditure level for each area
of decentralized public services. Also, there is a need for some reference
levels of local public expenditures related to delegated public services
funded by transfers. Only this way we consider there can be prevented
subjective allocation of public money, which undermines the general
interests of society and public money can be allocated in terms of efficiency.
The example above is not the only one who reveals the non-transparent
allocation of public funds from the central to local level. The Article no.34 of
the Law on Local Public Finance gives to under-governmental units the right
to receive money from the state budget, as subventions, to finance national,
county or local social development programs. Therefore, in the absence of
eligibility criteria, the allocations of public money have no predictability.
The areas covered by these kind of subvention have many directions of
money allocation, neither one is specified in official regulations, there are
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Vol. V, Issue 6 December 2015
not set standard returns as to compare the infusion of public money with
the results. In addition, the existence of a financing contract does not
guarantee any priority or opportunity for respective public expenditure, that
meaning is impossible to realize any effective control of financial and
material flows.
Although the shares deducted from income tax rates currently
follow a series of rules (the 82 percent of income tax collected at the county
level are distributed to different level of local public administration
according to their fiscal capacity, area and population), the way they are
distributed induce, if not accentuate, financial imbalances between
communities, because those ones which enjoy a better fiscal capacity receive
he most consistent amounts of money. So richest counties benefit from
higher infusions of public money as to balance their budget (and to expense
for their citizens benefit), which enable the diversification and the growth of
the volume for local public services, including access to new sources of
financing for local investments, which is considered a local development
ramp (the law is not specifying the need to balance current expenses with
current revenues and capital spending with capital revenues, so local
authorities may use current revenues, as transfers are, to sustain investment
expenses, instead to finance consumption). Instead, the poor counties will
remain poor, because the balance transfers are extremely low because of
poor amount of local income tax redistributed. A rethinking of the transfer
system at the regional level, with an expenditure equalization model
depending on proper local needs and public expenditure per capita on each
area of public services which are locally managed, not only on financial
capacity, would have positive effects in terms of citizens' access to goods and
public services they really need. Also, we consider that population and
county surface do not represent proper criteria for transfer distribution. A
poor county with small population and huge surface will receive lower
amounts comparing a reach county, with huge population and small
territory. These criteria only aggravate the discrepancy between the
efficiency in public goods supply between counties with different level of
economic development.
After transfers, local taxes are the most important sources of income
for local budgets. The right of local government to establish autonomously
the local taxes is provided in Article 9 of the European Charter of Local Self-
Government, with the main objective of bridging the volume and quality of
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goods and services with specific needs and desires of citizens and also with
their financial capacity. In Romania, fiscal autonomy is minimal, local
authorities have only the right to increase local taxes and fees established by
the Tax Code with up to 20% compared to the level calculated according to
the law. Also, they offer a bonus of 10% if payment of taxes is fully made in
advance7. In the context that local authorities have no right to set local fiscal
taxes, it would be welcome an increase of the freedom seeing the right to
increase or decrease the tax amounts by a higher level than 20%. That will
surely have effects as local authorithy responsibility growth and the increase
of financial autonomy.
In addition to fiscal revenues and transfers, local borrowing have a
very important role in terms of financing and gaining financial and
decisional local independence, with long-term effects in terms of economic
development. Under current legislation, local governments are unable to
increase local public debt (loans, interest and commissions related)
proportionally to their needs, and this situation limits their funding
possibilities. Thus, the total annual debt representing rates of the loans
contracted and / or guaranteed, interests and related commissions,
including the loan to be contracted and / or guaranteed year cannot exceed
30% of the total own income8. So, local public administrations cannot
enlarge their investment horizon, even some of them demonstrate sufficient
financial and management capacities9.
The correlation between local public financial autonomy and
financial market funding is positive and interdependent10
, so we suggest
local public borrowing liberty should grow in terms of some conditions, as
the financial capacity of collectivities and the success of local public projects
previously funded by such sources.
7 Law of Fiscal Code, no.571/2003, Official Gazette of Romania no.927/2003, with all amendments and completions; 8 Law of local public finances, no.273/2006, Official Gazette of Romania no.618/2006, with all amendments and completions; 9 Lacatus, C.,Vaduva, F. (2009). The Romanian Municipal Bonds –A Challenge For Local Public Finance And For Investors, Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol.12; 10 Mosteanu, T., Lacatus, C. (2008). The Municipal Bonds – the Cause and the Effect of the Local Financial Decentralisation Growth. Romanian Case, Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol.9;
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Statistics
Looking to historical data for the period 2006-2010, we concluded that own
local fiscal revenues of local administrative units are completed in a large
volume with transfers, namely shares and amounts deducted from income
tax or amounts deducted from VAT. Overall, these resources are the basis of
local public funding, covering, as shown in chart 1, over 75% of all funding
sources.
Within these tax revenues, local taxes have a small but a rising role
(chart 2). Amid the financial crisis which started in 2008, their level
decreased. We discover the same evolution for the tax revenues and total
public revenue, signaling there were some troubles in collecting local tax
from population and public services funding problems also.
Fiscal capacity of population reflected by the size of local own tax
revenue (property taxes) per capita is slightly increasing, exceeding 200 lei in
2010 (chart 3). But if we refer to all of the taxpayer's tax debt that is the
source of local budget, including shared taxes, we observe strong reduction
after 2008, explained by lower economic activity, lower incomes and the
reduction of consumption.
Figure 1: Share of tax revenue in local government revenues
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
Tax revenue shares in total local public revenues
The quota of fiscalrevenues in total localpublic revenues
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Vol. V, Issue 6 December 2015
Source: authors' own processing, based on data provided by National
Institute of Statistics, www.insse.ro;
Figure 2: The share of own local taxes in total tax revenues
Source: authors' own processing, based on data provided by National
Institute of Statistics, www.insse.ro;
Figure 3: Tax revenue per capita
Source: authors' own processing, based on data provided by National
Institute of Statistics, www.insse.ro;
0.00%
5.00%
10.00%
15.00%
20.00%
2006 2007 2008 2009 2010 2011 2012 2013
Own tax revenues share in total local fiscal revenues
the own fiscalrevenues quota intotal local fiscalrevenues
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1, the percentage of external local funding is declining. Also, we identified a
growth of own tax revenues combined with an increasing interest for
alternative local financial resources, as bond issue or bank credits11. All these
facts suggest an increasing local capacity for self-financing.
Reporting local public government revenue to local public
expenditure we identify the coverage level of local needs by local funds.
Indicators from this category include relevant data about the financial
capacity of the community and its dependence or independence of external
sources of funding, such as grants. In Romania, local revenue are regulated
by law12
and the main elements of classification are: own revenues (taxes,
contributions, amounts and quota deducted from income tax), amounts
deducted from certain income of the state budget, grants/subventions
received from state budget and other budgets. The report between the own
revenue and expenditure is an indicator often used in the literature related
to financial decentralization, namely Hunter index. According to the
statistical data, Romania register a high level of fiscal decentralization, since
over 50% of local government expenditure is financed by own revenues.
Classification of local revenues escapes the fact that income tax and
VAT are both state budget revenues, although they are generated, indeed,
locally and are strongly influenced by the local community and its economic
strength. Even if some of this amounts of money remain and are used at
local level, they still represent transfers from state budget, so it is
questionable to consider them own income.
Funding decentralized public expenditure is based on both kinds of
transferred amounts, specific allocations by budget laws and balancing
amounts. So we consider the classification provided by the Public Finance
Act inappropriate because splits the amounts deducted from VAT from own
incomes, even the law considers the transfers from budget revenues own
sources. So, we propose a more suggestive classification, which to take into
consideration local financial capacity: own regular revenues (local tax, bank
credits, municipal bonds), transferred revenues, including subventions
(grants), exceptional revenues. Under this new structure, the Hunter index
reduces substantially, down below 20% (Chart 5).
11 Constantinescu (Lacatus) C., (2010). ” Municipal bonds and their impact on local development”, PhD. Thesis, 2010; 12 Law of local public finances, no.273/2006, Official Gazette of Romania no.618/2006, with all amendments and completions;
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Figure 5: Hunter's indicator, calculated from two perspectives
Source: authors' own processing, based on data provided by National
Institute of Statistics, www.insse.ro;
Another aspect of the analysis is the level of public budget balance.
In the context that total public revenues are slightly in excess to public
spending, tax revenues (including transfers) are able to cover more than
90% of current expenditure, which is a signal of sufficient funding (chart 6).
In contrast, own tax revenues manage to cover no more than 15% of current
expenditure (chart 7), which demonstrates the impossibility of the local
government to be financially independent, in the context of a multitude of
decentralized public services to serve, of the limited local funding sources
and limited access to market capital 13
.
13 Constantinescu, C., Tanasescu, P. (2014). Municipal rating-is it necessary? Theoretical and Applied Economics, General Association of the Economists in Romania- AGER, supplement for International Finance and banking Conference FIBA, Bucharest, 2014;