Local authorities shall be entitled, within national economic policy, to adequate financial resources of their own, of which they may dispose freely within the framework of their powers.
The legal authority to perform certain functions is meaningless if local authorities are deprived of the financial resources to carry them out. The financial resources of local authorities are a sensitive topic and an important source of controversy in many countries, but this issue is especially delicate in Greece.
It was already addressed by Recommendation 247 (2008), according to which “the financing of the municipalities and communities remains most inadequate; it is based almost exclusively on transfers from the state”. It was recommended that the Greek authorities responsible for local and regional self-government: “c. guide the evolution of the financial system towards more extensive diversification of sources of local government revenue, as directed in Article 9, paragraph 4 of the charter, by developing the foundations of greater financial autonomy through levying of local revenue (dues and charges, borrowings and direct taxation); d. reinforce the system of local financing, in accordance with Article 9 (paragraphs 1 and 2) of the Charter, in the framework of devolution and transfer of powers to local authorities, looking to a larger proportion of local government funding in the GDP (gross domestic product) and in overall public spending”.
Local government revenues and expenditures are very low in Greece, as a percentage of GDP. The taxation autonomy of both tiers remains limited. Their total share of public expenditure is one of the lowest in Europe. More specifically, the two tiers of local government expenditure amounted to 2.8% of GDP in 2011 and 5.6% of total public expenditure. Local government revenue reached 2.6% of GDP and 5.6% of total public sector revenue in 2011.
The already existing difficulties increased in the recent years. From one hand, Kallikratis reform improved the competences of local authorities that subsequently would need more financial resources; from the other hand, the unprecedented financial crisis and the related Memoranda of Understanding imposed severe austerity measures and important budgetary cuts throughout the public sector.
The economic crisis had very heavy repercussions on the situation of local government in Greece. Rapporteurs were told that local and regional authorities have to “offer much more with much less”. General grants (CAF) decreased no less than 60% within 5 years. At the same time, municipalities faced increased claims for childcare, elderly care and especially for social assistance to jobless and poor people. Many municipalities proved to be very innovative, initiating “time banks” (service offers in exchange for other services), “social supermarkets”, “social drugstores” etc. At the same time, there were obvious efforts of the State and especially of the Ministry of Finance to control and coordinate financial management in municipalities, as showed above (sub art. 8).
In the written answer to the rapporteurs’ questions, the Ministry of Finance pointed out that the local government balance has improved significantly in recent years. This improvement is illustrated in fiscal outturn figures published by the ELSTAT. The high surpluses should be considered sustainable as also projected in the Medium Term Fiscal Strategy (MTFS) 2015-2018. It pointed out that due to the economic adjustment program, several measures were taken place in order to improve the financial situation of local authorities. Some of the measures aimed at improving own revenue such as increase in local tax compliance through the introduction of local tax clearance certificate requirement and increase other revenue due to economies of scale and better organization of collection mechanism while others targeted at the rationalization of expenses (e.g. introduction of electronic public procurement system, reduction in the cost of land expropriations, reduction in the number of fixed term contracts, cuts in public sector seasonal bonus, reduction in the number of advisors' positions of elected officials, flat rate for Chairmen and Managing Directors of Municipal Enterprises etc).
Moreover, despite the austerity measures which resulted in the reduction of Central Autonomous Funds (CAF), local authorities managed to successfully implement the aforementioned interventions and, therefore, contribute to the financial effort of the country mainly through the maintenance of own revenue (fees and royalties, income taxes, other fees and services, etc.) to high levels despite the economic recession and further rationalisation of operating costs. It should be noted that a key factor in achieving a positive balance for 2013 was the financing from the state budget to pay off outstanding obligations from the special appropriation of arrears clearance program.
The MTFS 2015-2018 points out that “The financial result improved in 2013 compared to 2012 and the most significant reasons are the maintenance of their own revenues at high levels despite the economic downturn, and the further rationalisation of their operating costs, which were decreased by approximately 12% compared to 2012. A crucial factor in achieving a positive balance in 2013 was the funding (about 933 million € cumulatively for 2012-2013) from the special allocation, of the State budget, to clear pre 2011 arrears”.
Notwithstanding, the rapporteurs cannot consider art. 9, para. 1 of the Charter respected in Greece: presently, local authorities do not dispose of “adequate financial resources of their own, of which they may dispose freely”. In practice, decision-making and especially implementation of policies often depend on resources controlled by the State and not by local authorities.
As for Article 9, para. 2 of the Charter, the principle of commensurability (according to which there should be an adequate relationship between the financial resources available to a local authority and the tasks it performs) has been violated since several additional responsibilities have been transferred to municipalities without the corresponding resources, as highest administrative court already acknowledged in more cases.
Paragraph 3 of Article 9 of the Charter requires that a proportion of local revenues should come from local taxes, and local governments must be able to determine the rate applicable. Paragraph 4 establishes the principle of diversification of financial resources of local authorities, while paragraph 5 establishes the principle of financial equalisation. Paragraph 6 provides for the necessity of proper consultation, paragraph 7 limits the special grants to local authorities and paragraph 8 disposes the access to the national capital market for local authorities.
On those issues, rapporteurs point out that, according to the data provided by the written answer of the Ministry of Finance, (quoting the fiscal outturn figures published by the ELSTAT for 2013), local government revenues’ structure is as follows: Grants from Ordinary Budget : 45% of total revenues Grants from Program Investment Budget: 11% of total revenues Other Revenues: 34% of total revenues (of which (a) revenues from reciprocal duties and rights: 15%, (b) tax revenues, duties, rights & services 7%, (c) other own revenues 6%, (d) revenues related to previous years 6%) Revenues collected on behalf of third parties : 10% of total revenues
The Local Government expenditure structure is described below: Personnel Remuneration: 25% of total expenditures Welfare benefits: 12% of total expenditures Interest Expenditure: 1% of total expenditures Program Investment Budget Expenditures: 17% of total expenditures Other Expenditures: 33% of total expenditures (of which (a) Payments related to previous years: 5%, (b) Transfers to third parties 10%, (c) Other operating expenditure 18% ) Expenditures on behalf of third parties:12% of total expenditures.
As described before, local authorities’ other revenues (e.g. excluding grants from State Budget & PIB) which represent approximately the 34% of total revenues are divided in 4 main categories: a. Revenues from reciprocal duties and rights: 47% of own revenues in 2013 b. Tax revenues, duties, rights & services: 22% of own revenues in 2013 c. Other own revenues: 13% of own revenues in 2013 d. Revenues related to previous years: 18% of own revenues in 2013 It must be noted that the share of the first three categories (a+b+c) is higher if we take into account amounts that refer to taxes, duties, rights, etc. but are related to previous years and are depicted in the fourth category.
Regarding the ability of Local Authorities to independently determine the burden of local taxes, the Ministry of Finance pointed out the following: Reciprocal duties are determined according to the cost of the offered service. The amount is approved by the City Council and the Secretary General of the Deconcentrated Administration The burden of other local taxes is provided by law and is not at the discretion of each Local Authority to alter.
Finally, the Ministry of Finance determines the total amount of statutory funds (Central Autonomous Funds (CAF)) as well as special grants given to Local Authorities taking into account the performance of specific taxes (e.g. VAT, CIT, ENFIA) and specific needs and events (e.g. economic recession, growing number of responsibilities). The redistribution and allocation of the aforementioned amounts are Ministry of Interior’s responsibility and are decided based on quantitative and qualitative criteria such as population, unemployment, growth, etc.
Other information on local financial resources has been provided, from a completely different point of view, by the Greek Ombudsman. According to Greek Ombudsman’s data the most common complaints concerning to the department of State-citizens relations and related to the first tier of local administration are the financial problems arising from the imposition of the local taxation. In addition the inefficient tax collecting affects the economic self-sufficiency of local government and their ability to fulfil their contractual or other obligations.
According to its experience the Ombudsman has come to the conclusion that local authorities are not sufficiently prepared to impose local taxation or, to be more specific, unable to implement the complex and -in many cases- outdated legislation.
Another serious problem is the inability of local government authorities to honour their financial obligations. The citizens often submit complaints because municipal authorities do not recognize their predecessors’ debts. Generally, local authorities refuse to fulfil their economic obligations arising either from the conditions of contracts or the rules of the relevant laws. Payment on time of the compensation for the expropriation of private property for urban planning processes is rare and many citizens ask for the Greek Ombudsman’s mediation.
Against this background, rapporteurs are fully aware of the unprecedented financial crisis and of the international constraints Greek authorities have to comply with. As important actors of the country, local authorities need to contribute to the consolidation process.
Nevertheless, rapporteurs believe that the economic and financial emergency cannot determine a suspension of the binding nature of the Charter. Thus, they should reaffirm, taking into consideration Recommendation 247 (2008), that the financing of the local authorities remains inadequate, as is based almost exclusively on transfers from the State.
The evolution of the financial system towards more extensive diversification of sources of local government revenue, as directed in Article 9, para. 4 of the Charter, by developing the foundations of greater financial autonomy through levying of local revenue (dues and charges, borrowings and direct taxation) is still missing.
The need to reinforce the system of local financing, in accordance with Article 9 (paragraphs 1 and 2) of the Charter, in the framework of devolution and transfer of powers to local authorities, looking to a larger proportion of local government funding in the GDP (gross domestic product) and in overall public spending is still current.
The rapporteurs believe that a real local democracy needs strong local and regional government disposing of more own resources and discretion to decide upon them. During the monitoring visit, rapporteurs found a vast consensus on the possibility that revenue from real estate taxation would be transferred to municipalities and regions, which would thus become less dependent on State grants, improving the level of tax collection and increasing their accountability to the citizens. Thus, rapporteurs invite the Greek authorities to seriously consider this possibility, already in place in many countries of the Council of Europe having a long and well-rooted history of strong and effective local self-government.