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.
Article 9 of the Charter consists of eight paragraphs which deal with various aspects of local government finances. It is essential for local democracy and self-government that local government has financial resources so that it can carry out its functions. The paragraphs of the article will be handled thematically, beginning with autonomy and access to independent and adequate resources, including taxes (paragraphs 1, 2, 3 and 4); continuing with grants and equalisation (paragraphs 5, 6 and 7); and borrowings (paragraph 8); following which the rapporteurs’ conclusions will be summarised.
Provincial and local government in Serbia is financed mainly by local taxes, shared taxes, transfers and grants. In 2015, 39% of local government income came from shared personal income taxes, 16% from local property taxes and 5% from other taxes. Transfers and grants represented 17% of this income, with 22% coming from other sources. The Autonomous Province of Vojvodina has a constitutional right to receive “at least 7% in relation to the budget of the Republic of Serbia” (Constitution, Article 184). Hence, transfers and grants are the main sources of revenue, representing 64% of income (2015). In addition, the autonomous province receives 9% of its income from shared personal income taxes, 10% from local property taxes and 17% from other sources.
The first four paragraphs of the article provide that local authorities should have adequate resources of their own and that these should be sufficient for the functions that local authorities are obliged to carry out. They should be able to set the rates of local taxes and charges. Resources should also be neutral with regard to economic fluctuations, such as changes in the rate of inflation.
Income tax is the largest source of revenue for local government in Serbia and is shared between local government and the State. The Law on Local Government Finance specifies the shares received by each level of government. The agreement between Serbia and the International Monetary Fund, aimed at stabilising public finances – partly by reducing local government spending ï€ has led to changes in the law and has reduced the shares allocated to local government. Hence, as of 2016, towns receive 77% (previously 80%), municipalities 74% (also previously 80%) and the city of Belgrade 66 % (previously70%) of the revenue. These reductions represent a yearly loss of income of 4.8 billion RSD, corresponding to 40 million EUR.
Another major source of income for local government is local property tax. This is entirely local so each local assembly can decide on the amount of the tax, but only up to a certain level, as set by the law. Hence, in practice, the room for manoeuvre is very limited.
The Autonomous Province of Vojvodina receives almost two-thirds of its revenue on the basis of the constitutional provision stating that the province should receive at least 7% of the state budget. However, the exact method of calculating this percentage is interpreted differently by the province and by the government and is also subject to interpretation by the Constitutional Court. According to the representatives of the province that the delegation met during the monitoring visit, the method that the government uses does not provide sufficient resources for the province. However, a settlement between the Province and the Government seems to be under way, and is to be codified in a Law on Financing the Autonomous Province of Vojvodina.
In addition to being unable to adequately finance provincial and local government tasks, many of the interlocutors stressed that reductions in funding had made it more difficult for them to pay competitive wages and to keep or recruit specialised administrative personnel (when permitted to do so). Low wages may also pave the way for corrupt behaviour.
Central government funding for local government is the subject of paragraphs 5, 6 and 7 of Article 9 of the Charter. They require transparency of the financial equalisation process and in the way central government funding is calculated, stipulating that local government needs to be consulted on these matters and emphasizing that not all grants should be ear-marked. The grants are regulated in the Law on Local Government Finance. Grants consist of non-categorical transfers (the equalisation transfer, compensation transfer, general transfer and solidarity transfer) and category grants, which are ear-marked for funding certain tasks or expenses.
Financial equalisation is achieved through several types of grants. The equalisation transfer is allocated to local government units in which the population's average income per capita is below a certain level. In addition, the least developed local authorities receive a comparatively larger share of the general transfer. In its written reply to the rapporteurs, the Standing Conference of Towns and Municipalities stated that it regards this system as insufficiently transparent. It was claimed that no municipality in Serbia would be able to calculate by itself the amount of transfer funds that it should rightly receive.
Most of the grants for local government are general, although the Law on Local Government Finance (Article 45) recognises category grants for special purposes or projects. Several of the interlocutors highlighted transparency problems with the category grants provided by the government. In the very tense economic situation currently experienced by local government, a last resort would be to turn to the Ministry of Finance to apply for support from its reserve fund. However, the criteria for allocating money from this fund seem to be less than clear-cut. This practice has thus been criticised as being arbitrary and non-transparent, and some sources raised concerns that it has been misused for political purposes.
On the other hand, consultation mechanisms in connection with central government funding of local government seem to be quite well developed. The Intergovernmental Finance Commission plays an important role in this consultation process.
Serbian local government has the right to borrow money on the market within the limits of the law, as stipulated in paragraph 8 of the Charter. However, this is not unrestricted and the government has set ceilings for local debt, meaning that local government units need approval from the Ministry of Finance before increasing their debt.
It may be understandable that local government should shoulder its share of responsibility in Serbia’s attempt to achieve economic stability. However, austerity measures and significant budgetary cuts throughout the whole public sector, whilst the functions of local government remain the same, cause difficulties in ensuring commensurate financial resources for local authorities as required in paragraph 2 of Article 9 of the Charter. In addition, until the new law on financing the Autonomous Province of Vojvodina is adopted, the province remains underfinanced in relation to its responsibilities. Local government units collect their own taxes but have limited powers to determine the rates. The rapporteurs also identified several problems relating to the transparency of how state grants are distributed, notably a lack of clear criteria for allocating resources from the reserve fund and a lack of transparency in the system of equalisation.
To summarise, the rapporteurs are of the opinion that Serbia generally complies with paragraphs 3, 4, 6 and 8 of Article 9. However, it only partly complies with paragraphs 5 and 7 and demonstrates non-compliance with paragraphs 1 and 2.