Principle of Subsidiarity

1. Public Expenditure ConferenceApplying Subsidiarity Principle in the Transition Context: Lessons from South East Europe to Guide the Diagnosis in BIHSarajevo, March 4-5 2003

2. Principle of Subsidiarity • The general aim of the principle of subsidiarity is to guarantee a degree of independence for: • lower authority in relation to a higher body • local authority in respect of a central authority • It involves the sharing of powers between several levels of authority

3. Principle of Subsidiarity • Subsidiarity has three primary, generally accepted applications: • Philosophical • Legal • Technical

4. Principle of Subsidiarity • The idea of subsidiarity is entrenched in the process of European integration • 1951: Article 5 of ECSC Treaty • The Community should exert direct influence on production only when circumstances require it • 1987: Article 130r EECT of Single European Act • Subsidiarity criterion included, but not expressly defined • 1988: Article 5 of European Charter of Local Self-Government • Public responsibilities should be exercised by those authorities that are closest to the citizens • 1992: Article 5 of Treaty on European Union

5. Principle of Subsidiarity • Application of this principle has expanded into many areas: • Economic • Political • Social • Environmental

6. Principle of Subsidiarity • Application of the principle to intergovernmental relations requires two strong pillars: • Lowest denominator – municipality, canton, local government • Highest denominator – power that can resolve problems that cannot be solved at the lower levels

7. Subsidiarity in the SAP Countries • No explicit mentioning of subsidiarity in the SAP or accompanying CARDS Program • Principle behind key objectives of SAP • Democratic Stabilization • Building the Institutions of the State • Supporting Development of Civil Society and its Institutions • Public Participation in Policy Debate and Accountability of Government • Regional Cooperation and Key Sectors (e.g. Infrastructure)

8. Macroeconomic and Public Finance Aspects of Decentralization • The concerns • Decentralization of government functions raises challenges for macroeconomic control at the national level • Local accountability involves the transfer of financial competencies, together with municipalities’ right to borrow • Uncontrolled access to capital markets and mismanagement of budgets by local governments could destabilize the economy • Decentralization and creditworthiness could be conflicting goals

9. Macroeconomic and Public Finance Aspects of Decentralization • Trade-offs • Local budgets typically subject to central control, monitoring preferable over direct control • Central governments discharge own responsibilities to lower tiers: proper co-funding an issue • Changes in state regulations, budget processes, social policies essential, predictability, however, a challenge for lower tiers

10. Building Blocks of DecentralizationThe Rules • Expenditure and Revenue Assignment • Local revenue is the cornerstone of fiscal decentralization, however, expenditure assignment has to precede revenue assignment • Objectives of expenditure and revenue assignments • National equity • Efficiency of the internal common market • Economies of administration and transaction costs • Grouping of congruent services at local, regional and national level

11. Building Blocks of Decentralization Criteria for Tax Assignment

12. Building Blocks of Decentralization • Intergovernmental Transfers • Whatever local system is established in a country, there will be a need for grant or revenue sharing because local expenditure needs typically tend to outstrip local resources • Hence, design of a grants system is of a prime importance • In general, intergovernmental transfers should be based on rules that are: • Stable • Transparent • Non-arbitrary • Universal • Non-negotiable

13. Building Blocks of Decentralization • Stabilizing Municipal Budgets and the Working of the Transfer System • The grants/revenue-sharing system is sensitive to variations in the business cycle, with negative impact on the creditworthiness of municipal governments • Therefore need for a stable source of revenue (e.g. property tax)

14. Building Blocks of Decentralization • Municipal Debt • Creditworthiness measured by the size of deficit of municipal budgets relative to their resource flow • Recurrent spending very high in municipal budgets • Borrowing for current expenditures to be avoided

15. The Preconditions

16. Essential Principles to Support theBuilding Blocks The Political Side

17. Essential Principles to Support the Building Blocks • Finance Follows Function • Strong Central Ability to Monitor and Evaluate Decentralization • Transfers of Significant Taxing Power to Local Government • Not Change the Rules Half Way Through • Intergovernmental Transfer System to Match the Objectives of the Decentralization • Hard Budget Constraint

18. There Must be a Champion for Fiscal Decentralization

19. There Must be a Champion for Fiscal Decentralization

20. There Must be a Champion for Fiscal Decentralization

21. Were do we Stand in Bosnia • Policy Dimensions of the Reforms • Significant progress has been made in reforming and harmonizing indirect tax policies through: • Rationalizing exemption policies • Lowering rates • Broadening the tax base • Harmonizing the point of indirect tax collection • Similar reforms are now being designed for direct taxes, VAT is being considered as a replacement for the sales taxes • Excessively high combined taxes on labor, including wage taxes and social contributions, have been nearly halved from their post-war highs of about 80-90 percent of net wages • The trade regime is now being further liberalized within the Stability Pact framework for South Eastern Europe

22. Were do we Stand in Bosnia • Institutional Dimensions of the Reform • Initial steps include the establishment of basic fiscal management capacity and the adoption of legal and institutional frameworks for budget and debt management system • Promoting credibility, transparency and accountability in the public sector management has gained an increasing emphasis • A major reform of the payments system has been introduced, involving the re-integration of key public resource management and control functions to those public institutions where the normally belong for the transparent and efficient operation of the public sector • Initial tax administration reforms are also being broadened to improve cooperation between Entity tax administration systems and to effectively introduce anti-tax evasion and avoidance rules

23. Were do we Stand in South East Europe • Looking forward • The development of a sustainable fiscal stance will take place in all countries of South East Europe in a complex and evolving policy and institutional setting, with many uncertainties along the way • If it is not well coordinated, well timed, and kept within the financial constraints, this process could aggravate the present fiscal fragilities • Several critical issues will need priority attention concerning: • Streamlining public administration • Securing own-sourced financing for the State administration • Formally coordinating public finance policies between the State and the Entities and within the Entities • Developing mechanisms for balancing revenue and expenditure assignments between multi-tiered governments against development needs and the need for rationalizing the role of the public sector in the economy

24. Annex

25. BiH: Distribution of Municipalities

26. BiH: Sub-Entity Total Public Expenditure

27. FYR Macedonia: Distribution of Municipalities

28. Serbia and Montenegro: Distribution of Municipalities

29. THE END