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1 State grant systems with a special focus on Hungary Council of Europe Workshop Belgrade, 1 November, 2006 Gábor Péteri, peteri@pontes.hu
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2 Grants and transfers: an outline 1.Intergovernmental fiscal architecture 2.Why transfers are needed? 3.Models and schemes 4.Allocation techniques in Hungary
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3 Local expenditures in percentage of GDP
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4 Size of local governments
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5 Local revenues, Hungary (2005) Own current revenues:27% Own capital revenues:9% Shared taxes:16% Grants:29% Transfers:15% Loans:4% Total:100%
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6 Why transfers are needed? Guarantee the minimum level of public services (vertical equalisation) Achieve efficient service provision Balance low revenue raising capacity But not for Supporting specific needs (above standard/average) Encouraging inefficient service provision
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7 Objectives of transfers: efficiency and equalisation
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8 Classification of transfers and grants 1. Types of grants: General purpose or specific/conditional Current and capital grants 2. Local autonomy in spending: Discretionary or mandatory/limited 3. Method of allocation: Formula based or arbitrary Mixed objectives => Parallel diverse methods
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9 Basic models of grant allocation G calculated = Ei standard - Ri required Ri required Ei standardized 3. E & R capacity G normative RE=R+G normative 2. Control over transfers Ei estimates -Ri planned = Gi Ri planned Ei estimates 1. Control over E & R (gap filling) TransfersRevenuesExpendituresModels
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10 Typical grant schemes in SEE 1.Gap filling: Moldova, Macedonia, Bulgaria (labour) 2. General grant: Albania, Croatia (in areas of special state concern), Macedonia, Serbia 3. Standardised method: Slovenia (expenditures), Albania (revenues), Serbia (revenues)
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11 Allocation of local government transfers, Hungary
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12 Shared and origin based PIT (Hungary)
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13 Indicators for grant allocation Resident population (total, elderly) Lump sum per municipality Client/customer served Local tax on tourism collected (1:2) Administrative services (delegated) Services provided (liquid waste from septic tanks) Residents eligible for welfare payments Active population, not paying personal income tax
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14 Transfers in education
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15 Revenue equalisation 1.Scope: PIT and local business tax (LBT) 2.Averages: per capita by population size and administrative status 3.Standard rate: 70% of maximum LBT rate 4.Equalisation method: –below average => supplemented –above the average => deducted 5.Deduction is digressive, with built in breaks
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16 Gap filling: deficit grant 1.Scale: 1.2% of grants, 1/3 of municipalities 2.Assessment of current spending needs: –Minimum population size (cooperation) –Required minimum capacity of schools –Limited increase of salaries –Expenditures are 90%-110% of national averages 3.Standardised revenues: –Collected local taxes: average LBT –User charges: increased by the inflation rate
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17 Summary of grant allocation issues Scope of grants and transfers Composition of grants (diversity of objectives) Incentives created: E-R=G or G+R=E Assessment of expenditures: inputs or needs Estimation of revenue raising capacity Grant allocation methods: –Formula based or arbitrary –General or earmarked –Discretionary or conditional Planning process: predictability, transparency
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