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 financial resources of local authorities are a hot topic and an important source of controversy in the Netherlands. It is important to note that the Netherlands made a declaration in their instrument of acceptance (1991) that “it shall not consider itself bound by the provisions of Article 9 paragraph 5 of the Charter”.
In purely legal terms, Article 132 para.2 of the Dutch Constitution provides that: “the taxes which may be levied by the administrative organs of provinces and municipalities and their financial relationships with the central government shall be regulated by Act of Parliament”, and the Municipalities Act include extensive provisions on municipal finances (Articles 186- 266). Furthermore, the Financiële Verhoudingswet regulates the intergovernmental financial relations.
As noted supra, this aspect of the Dutch system of local government was analysed in extenso on the occasion of the last Congress monitoring report on the Netherlands (2005). Recommendation 180 (2005) on the state of local finances in the Netherlands Congress mainly discussed the situation of local finances in the Netherlands, based also on Recommendation 79 (2000) on the financial resources of local authorities. In that document, the Congress noted that the local taxation system of the Netherlands was characterised by the fact that 83% of the local fiscal revenue derived from the real estate tax, that the part of the fiscal local income covered only 8.8% of the municipal revenue and that the local taxes covered only 1.1% of the GDP of the country. In the prospect of – by that time – announced amendments on the financial scheme for local authorities in the Netherlands, the Congress recommended the Dutch authorities that they change the provisions of the draft law so as to grant the municipalities an alternative possibility of levying local taxes; furthermore, it called on competent Dutch authorities to consider not following up on the proposals, which would infringe upon Article 9 of the Charter. It also recommended that the Dutch government continue to seek, in co-operation with the Association of the Netherlands Municipalities, ways and means to grant the municipalities by law, as from 2007, an alternative source of local fiscal revenue (simultaneously with the reform of the real estate tax) at least of the same volume as the current real estate tax of which they will have the freedom to determine the rate.
In a nutshell, the present situation of local finances (both municipalities and provinces) in the Netherlands may be presented as follows:
Sources of funding
Local bodies receive budget from different sources: a) Local taxes and other income (for example from land development), b) Lump-sum payment from the Government funds (algemene uitkering, Municipality fund and Provincial fund), c) Allocated payments from the Government funds (integratie- and decentralisatieuitkering), d) Specific transfers from line departments (specifieke uitkering), e) The sale of property and assets.
They see fit, where part of that will be used to execute tasks that are set by law. The Government does not formulate binding instructions or guidelines for decentralised governments for setting priorities, programmes or policies, nor does any other Cabinet member. The local democratic process is responsible for the planning and the budget. The Ministry of Interior guides the local governments executing their tasks. In the case of specific transfers (letter “d”, above) local authorities have the obligation to provide ex-post information on the allocation of those payments, to make sure that the money was spent on the goal as described by the competent State department. If not, the money is claimed back from the local authority.
Municipalities also get some subsidies from Provinces: for example, subsidies for special initiatives that are also in the province´s interest. Those are for investment in roads and public transport stops, or making plans for touristic places. On the other hand, local authorities can ask for loans from the private sector and form public debt, and the prior approval of the Ministry of Finance is not required.
At least twice a year, there is a formal meeting (called “Bofv”) between the Government and the representatives of local authorities on financial issues. The allocation of financial resources by municipalities is not part of these meetings, since decentralised governments are free to spend most of their resources, as long as the local democratic process supports it.
Articles 189 and 193 of the Municipalities Law and the Provincial Law respectively state that the municipal and provincial boards need to make sure there is a balanced budget, but that the board can deviate from this when it can make a case that a balanced budget will be achieved within the next three years. In law, there is no limit to the deficit that can occur under these rules. It is up to the financial supervisor of the municipality or of the province to determine what is an acceptable deficit, given the situation. If it is not plausible to assume that a balanced budget will be achieved within the following years, the supervisor will intensify its control.
Some fresh data on the financial situation of local authorities
Proportion of transfers granted to municipalities by the State which are free and “earmarked” (pattern of evolution for these figures in the last five years).
Official position of the Ministry of Finance on the subject of local authorities finance
The fact that the main source of funding for Dutch local authorities comes from central government transfers is not new. A major source of income is the lump sum payment that municipalities receive from the Municipality Fund. Local authorities have complete autonomy as to how they spent this income this income as well as income generated by local taxes. This situation is seen as satisfactory by the present Cabinet. On the other hand, there are no measures taken to increase the tax base or the taxing power of local authorities.
The Dutch government supports the view that it has to fulfil the pledge, made in 2005, to increase the Municipal Fund, in order to compensate municipalities for the loss of income produced by the reform of the real estate local tax. As a matter of fact, in 2006 an amount of approximately 1 billion euros was added to the Municipality fund to compensate the loss of income.
The law that describes intergovernmental financial relations (‘Financiële Verhoudingswet’) provides for a safety net for municipalities that have an unbalanced budget (Article 12 of that statute).
The State’s contribution to the funds is linked to the development of central government’s spending. Because of the economic crisis, there have been budget cuts in the central government budget. Therefore, the State’s contribution to the Funds has been cut as well.
For 2012, the volume of debt of local governments amounted to 53.8 billion euros. One of the measures that are being taken is that local government will be obliged to keep their deposits at an account at the Ministry of Finance (treasury banking).
During the consultation process, the Minister of the Interior and Kingdom Relations informed the Rapporteurs that a letter had been sent in October 2013 to the House of Representatives on the subject of the “Design of the Constituent Fund for the Social Domain”, concerning the sub-fund for the financial compensation of the future decentralised responsibilities of municipalities in the social area. For this new responsibility, a specific budget without separate divisions, aimed at inceasing participation in society, was considered appropriate. With this “design”, the Cabinet sought for a balance between, on the one hand, the policy freedom for municipalities to provide local services and on the other, the measures necessary for its successful implementation during the first transitional years.
Although the Congress Recommendation 180 (2005) did not have the desired impact on national authorities and the situation remained unchanged. Its findings and general assessment of the insufficiency of the “own resources” of municipalities are still valid today. In the last years, the legal context has not been amended in order to increase the local taxes or “own resources” in general. Although Dutch municipalities do levy some taxes, they are mainly funded by a central government-run program, called “Municipalities Fund”, which transfers the amount granted to every municipality according to a complex set of criteria, data and coefficients (more than fifty).
Local leaders concurred on this view, and they claim that their own income remains limited; that they are not fully compensated for the execution of central government tasks in the framework of joint authority; that, if the sustainable government finance white paper is approved, local governments will be hindered in making investments and using their reserves. Since they will no longer be able to place their assets with a bank of their choice, but only with the central government (treasury) banks, they will get reduced returns because the interest rate paid by central government is considerably lower than that offered by the banks. Therefore, and according to local representatives, the Law on the Public Finance (Hof) and the ‘Schatkistbankieren’ (financing by the Treasury) have shown so far examples of what should be avoided. Furthermore, in the Council of State’s publication ”Inter-administrative Relations Re-evaluated” (page 32), it is stated that “the Department has also evaluated two legislative proposals (the Sustainable Public Finances Act and Treasury Banking) which, according to the IPO, VNG and UvW, are being considered jointly as an attempt to limit the powers of decentralised authorities to manage and allocate their general resources for themselves”.
All the local politicians met by the Congress delegation stressed the view that the local taxation reform has limited the income of municipalities, since tenants of houses do not pay the general property tax. Furthermore, municipalities also complain about the fact that the Municipalities Fund has suffered subsequent reductions over the years. The Minister of the Interior and Kingdom Relations refers to the report of Staat van Bestuur 2012 (Administration report) that stipulates that the size of the Municipalities Fund has increased in recent years. Municipalities in the Netherlands claim that their tasks have increased which mean a relative loss of fund. As regard the next decentralisation processes, concerning social programs, will be performed by the central government, but the State is not going to give the municipalities the same amount of money that is spent by State agencies on those programs. In the government’s understanding, because municipalities will be responsible for implementing those programs, the fact that they are the administration closest to the citizens will produce in itself some savings and “efficiency gains. Therefore, it is expected that municipalities will be able to implement those programs at a lesser cost. These efficiency gains and savings have been calculated unilaterally by the central government, without sufficient analysis and municipalities complain about the fact that they cannot provide these programs, at the same quality level, with far less money than before.