BELGRADE, May 27, 2013 – Serbia must find ways to reduce the level of financial support it provides to local governments if it is to restore fiscal balance, says the new World Bank report “Serbia: Municipal Finance and Expenditure Review”, which is launched today in Belgrade. In response to current economic conditions, the central government is making fiscal adjustments, raising tax rates and reducing spending. But local governments have been partially shielded from pressures to adjust by the increase in their share of the payroll tax from 40 percent to 80 percent. “This is not the time to debate whether local governments have too much money or too little”, says William Dillinger, Lead Public Sector Management Specialist, one of the authors of the report. “Given the fiscal situation, both levels of government must adjust.”
The most straightforward way to do this would be to reduce the share of the payroll tax that is retained by the municipalities, according to the report. Another, less desirable way, would be to the reduce level of general transfers. Attempts to solve the problem by shifting new functions on to local governments have not succeeded so far. Most of the proposals for further functional decentralization raise more problems than they solve.
The report examines how local governments could adjust to a reduction in central government support. One option would be to increase the yield of local revenue sources. In principle, the yield of the urban property tax could be increased, as current levels are generally low. But raising the rate on residential property can be politically difficult. A less controversial approach would be to change the way the industrial and commercial property is valued, so as to approximate market values. Municipalities could also generate revenue by increasing the level of land development fees in outlying areas, according to the report. In addition, some local authorities can generate considerable income through the sale or lease of land they own outright.
Local governments can also adjust by reducing expenditures. Reducing subsidies to municipal enterprises — particularly transport, water supply and district heating companies — is one option. In principle, this could be accomplished by increasing tariffs. But this would merely pass the cost of inefficient company operations onto consumers. Local governments should therefore explore other alternatives as well. In the public transport sector, this would include improving tariff collection enforcement and reducing exemptions. In the water supply and district heating sectors, it would include rationing demand by metering individual consumers and rationalizing utility networks.
The report also notes the potential risk of excessive borrowing, due to gaps in budget regulations. The report recommends restoring the former ceiling on long term debt.
The report, finally, recommends that the overall structure of intergovernmental fiscal relations be stabilized. Once the municipal share of the payroll tax and the level of general transfers are adjusted to sustainable levels, the Government should refrain from making ad hoc adjustments in the intergovernmental fiscal relationship. It should also simplify the formula for distributing general transfers and ensure that transfers are fully funded in annual budget.