In this given legislative context, with respect to the general equation of resources and needs, the analysis of the vertical (un)balance is based on the following indicators: the weight of the general consolidated budget in the GDP, the weight of the central budget in the GDP, the weight of the local budgets in the GDP, the weight of the local budgets in the general consolidated budget, the weight of the local budgets in the central budget, the weight of the central budget transfers in the GDP and the weight of the equalization transfers in the central budget. Likewise, the Hunter coefficient has also been calculated.
The next diagrams show the evolution of these indicators between 1994 2003 and 2004 (forecasts).
Against the same background of the discrepancies between the available resources and the existing needs, this section also includes a description of the weight of the outstanding payments (arrears) in the total expenditures, this time only for 2003, for each county.
The weight of the local government-related expenditures in the GDP has practically doubled in 2004 (6.75%) as against 1994 (3.49%) see Diagram 3.1. The evolution (trend) of this weight had a very interesting route: it grew between 1994-1996 due to the transfer of new responsibilities to the local government. Between 1997-1999 the weight of the LG -related expenditures in the GDP has dropped slightly, but constantly, due to the difficulties attached to the structural adjustments of the public sector in that interval. The upward trend of the LG-related expenditures in the GDP was resumed in 2000, while in 2001 a major leap took place (from 4.12% to 6.04%) following the transfer of the salary payments from education to the local government. Another leap, of a smaller extent, occurred in 2003 (from 6.12% to 6.78%) following the enhancement of the social protection expenditures under the LG responsibility (see Box 3.2.4. LG items/chapters of expenditure).
The same format was taken by the trend of two other indicators: the weight of LG expenditures in the general consolidated budget and in the central budget see diagrams 3.2. and 3.3. The previous explanations are also valid for this situation. It is interesting to note that in 2003 the LG budget is almost half (45.58%) of the central budget, which reflects the scope of the decentralization process developed in recent years.
3%
4%
5%
6%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Diagram 3.1. Weight of LG expenditures in the GDP
7%
9%
11%
13%
15%
17%
19%
21%
23%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Diagram 3.2. Weight of LG expenditures in the general consolidated budget
10%
15%
20%
25%
30%
35%
40%
45%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Diagram 3.3. Weight of LG expenditures in the central budget
Diagram 3.4. shows the evolution of the transfers from the central budget to the local government. The shape of this diagram is quite similar to the previous ones. One has to note the much more obvious minimum value of 1999 which is due not only to the general contraction of public spending, but also to the introduction of a new legislation which has brought about a spectacular growth of LG revenues derived from local fees and taxes as well as a matching diminution of the central budget transfers. This is also reflected by the evolution of the Hunter coefficient (see Diagram 3.5.) which had a maximum value in 1999.
The trend of the equalization transfers (see Diagram 3.6.) displays a major leap in 2002.
This is due to the introduction of certain special-purpose amounts in the equalization transfers, which makes them conditional transfers. Thus, the amounts dedicated to the payment of the minimum income, the heating subsidies for poor families and the salaries of the caretakers of people with disabilities were introduced in the chapter called in generic terms “grants deducted from the personal income tax (PIT) for local budget equalization” although the central budget legislation provided the specific amounts for each specific purpose as well as the obligation to observe .
Diagram 3.6. shows the trend of the Hunter coefficient. This coefficient reflects the LG dependence on the transfers from the central budget. The trend of the Hunter coefficient is quite interesting: between 1994-1998 a low-range variation has taken place, reaching a value of 0.25 in 1998 from 0.175 in 1994. Then a spectacular increase of the Hunter coefficient occurred in 1999 up to about 0.5 following the inception of the fiscal decentralization process and the tremendous growth of the local fees and taxes collection process. A small decrease took place in 2000, followed in 2001 by a value of only 0.28, pursuant to the assignment of new responsibilities to the LG financed only from transfers (in their vast majority conditional grants) from the central budget. In 2004 the estimated value of the Hunter coefficient is 0.25, that is identical to the value of the same indicator before the inception of the fiscal decentralization process. This phenomenon, of the Hunter coefficient's return to values prior to 1999, is also due to the decrease of the LG ability to modify and adjust the local fees and taxes. Thus, by the legislation passed in 1999, the LG could modify the local taxes and fees by +/- 50%. Following the G.O.
36/2002 on local taxes and fees, the LG could only increase them by 50%, whereas the Fiscal Code cut this level down to 20%. At the same time, the LG was no longer allowed to adjust the tax base for the local fees and taxes by issuing its own resolutions. Moreover, the central government has introduced a set of incentives attached to the payment of local fees and taxes for the elderly and for people with low incomes.
Dependence
The local government
dependence on transfers from central budgets has increased between 1999 - 2004.
1%
2%
3%
4%
5%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Diagram 3.4. Weight of central budget transfers to LG in the GDP
0,1 0,2 0,3 0,4 0,5 0,6
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Diagram 3.5. Evolution of the Hunter coefficient
0%
1%
2%
3%
4%
5%
6%
7%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Diagram 3.6. Weight of equalization transfers in the central budget
All these measures have contributed to the growth of the LG fiscal dependence on the central government.
The information included in Diagram 3.7. reflects the weight of arrears in the total expenditures only for 2003 at county level, while as a national average, the percentage of arrears in the LG-related expenditures is not so significant: 2.81%. It is most likely that this percentage does not include yet other categories of LG debt:
? The price subsidy not paid to the heat suppliers
? The debt to the education system public utilities
? The sums not paid to the beneficiaries of the minimum income program
? The salaries not paid to the personal assistants of people with disabilities.
The assessment of all these debts is very difficult if we think in terms of the accounting system (based on cash settlements) used at local government level. Starting with 2004, once the E.G.O. No. 45/2003 on local public finances (endorsed by Law No. 108/2004) entered into force, the first elements of engagement-based public accounting were introduced.
The examination of the arrears at county level in 2003, by establishing their weight in the local government spending, shows us yet another interesting issue: in general terms, the poorer areas (with a lower PIT per capita than the national average: Braila, Giurgiu, Vaslui, Vrancea) are hit harder by this phenomenon and so are the counties whose economic activity relies greatly on large state-owned companies which are “involved” in the financial insolvency process that generally impacts the public sector (for instance Gorj county which is a “champion” in this respect, with a percentage of over 14% or, quite surprisingly, counties Prahova and Suceava).
The methods used to provide the vertical balance, or to diminish this kind of unbalance, are as follows:
? Assigning new financial resources to the local government
? Developing the system of national shared taxes
? Increasing the national-level volume of resources dedicated to equalization and allocated as unconditional grants.
Diagram 3.7. Weight of arrears in the total expenditures for 2003 at county level
0,00 0,02 0,04 0,06 0,08 0,10 0,12 0,14
Sălaj Mureş Tulcea Arad Constanţa Sibiu Harghita Timiş Dolj Bihor Alba Braşov Teleorman Covasna Cluj Bistriţa-Năsăud Călăraşi Ialomiţa Galaţi Botoşani Bacău Vâlcea Bucureşti Maramureş SatuMare Dâmboviţa Ilfov Argeş Caraş-Severin Neamţ Iaşi Hunedoara Mehedinţi Buzău Brăila Olt Vaslui Prahova Giurgiu Vrancea Suceava Gorj
As policy recommendations meant to downsize the vertical unbalance (see the first section on Principles of fiscal decentralization in Romania) the methods used consider the allocation of additional financial resources to the local government, the implementation of a national shared taxes system or the national-level increase of the volume of local budget equalization resources (distributed as unconditional grants) . 2
For the time period examined, and based on the data available from the Ministry of Public Finances, one can note the progress of the ratio between the PIT used by the local government in all the counties (in all its categories: shares deducted from the PIT, equalization grants deducted from the PIT, conditional grants, etc.) and the PIT collected in the counties between 1999 - 2003 (see the Maps 1-5). One can see that the PIT utilization rate by the local government has steadily increased (from 68.2% in 1999 to 95.5% in 2003), and the number of counties which use the PIT (regardless of its shapes) more than they collect has increased from 3 in 1999 to 34 in 2003.
To conclude, we would like to mention that in close connection to the vertical balance, there is also the issue of the horizontal balance; the local budget equalization policy is meant to downsize both the inter-county and the intra-county horizontal unbalances. In the following pages you will find a detailed analysis of the evolution of the horizontal unbalance-related indicators in the 1999 -2003 interval.
Dependence
The number of counties which consume PIT more than they collect has increased between 1999 - 2004.
80%
69%
68%
72%
68%
93%
165%
80%
65%
52%
88%
90%
80%
63%
61%
69%
68%
64%
99%
64%
85%
68%
88%
86%
85%
90%
68%
91%
78%
62%
101%
84%
70%
104%
87%
67%
117%
138%
73%
93%
82%
69,7% la 100% (22) 52,9% la 69,7% (14)
Lack of data (1)
Self-sustaining counties Donor counties
Map 1. The ratio between the PIT used/PIT collected by the LG, by county, for 1999
96%
66%
92%
81%
81%
84%
81%
105%
206%
90%
76%
48%
119%
153%
128%
67%
71%
88%
85%
75%
133%
82%
106%
89%
120%
96%
98%
114%
78%
120%
104%
76%
117%
101%
73%
144%
145%
74%
112%
157%
94%
121%
100% la 206,9% (18) 73,8% la 100% (19) 48,4% la 73,8% (5)
Map 2. The ratio between the PIT used/PIT collected by the LG, by county, for 2000 Legend
Receiving counties Self-sustaining counties Donor counties
73,4% la 100% (23) 51,7% la 73,4% (5)
90%
65%
85%
78%
76%
80%
78%
97%
208%
86%
72%
51%
117%
130%
133%
73%
73%
86%
87%
82%
116%
78%
104%
92%
110%
96%
94%
108%
75%
97%
88%
74%
110%
90%
73%
119%
126%
74%
112%
134%
84%
110%
Map 3. The ratio between the PIT used/PIT collected by the LG, by county, for 2001
Self-sustaining counties Donor counties
100% la 233,4% (29) 90,1% la 100% (8) 60,1% la 90,1% (5)
114%
71%
112%
98%
95%
103%
103%
133%
233%
121%
93%
60%
167%
182%
172%
84%
85%
117%
103%
93%
165%
93%
133%
103%
141%
138%
123%
130%
99%
140%
111%
93%
139%
118%
90%
181%
149%
94%
120%
210%
119%
151%
Map 4. The ratio between the PIT used/PIT collected by the LG, by county, for 2002 Legend
Receiving counties Self-sustaining counties Donor counties
95,5% la 100% (1) 56,8% la 95,5% (7)
139%
79%
131%
101%
102%
112%
111%
148%
267%
136%
90%
56%
155%
198%
167%
85%
85%
135%
115%
110%
191%
95%
127%
118%
165%
146%
152%
152%
110%
180%
138%
97%
154%
136%
102%
198%
157%
85%
144%
246%
129%
175%
Map 5. The ratio between the PIT used/PIT collected by the LG, by county, for 2003
Self-sustaining counties Donor counties