Local governments to get more say over their budgets
Municipalities will receive €120 million in support for their budgets that has until now been funded directly by the state. For municipalities, this means greater discretion over how the money is spent.
Currently, the state gives local governments money in the form of earmarked grants, meaning the money must be used exactly as the state specifies. Starting next year, the plan is to distribute some of those grants, totaling about €121 million, to municipalities through an increased share of income tax revenue and the equalization fund.
"From now on, municipalities themselves will be able to decide, based on their overall revenue base, which services need funding and by how much because municipalities know local life best — what the needs are and how those resources should be used," said Andrus Jõgi, an adviser in the local government department at the Ministry of Regional Affairs.
Local governments have long awaited the change, because the grants have not been adjusted to reflect rising prices.
"If the roughly €29 million in road funding that the state gives municipalities had been turned into an income tax component 10 years ago and if that amount had grown by even a modest estimated 3 percent per year, then today the figure would be €10 million higher," said Saue Rural Municipality Mayor Andres Laisk.
Some municipalities fear the new model could reduce their revenues, but the draft proposal includes a minimum threshold that would prevent any decline in income. However, additional funding is needed to ensure no one ends up worse off and that could prove problematic.
"It will arrive most slowly for municipalities like ours that are in growth areas: around Tallinn, around Tartu. Rural areas will benefit more quickly. But ultimately, over time, the revenue base will be indexed for everyone, assuming the state finds a solution. To maintain that minimum threshold so no one ends up in the red, the state would need to add €3.5 million to the overall system, which, considering the total size of municipal funding, is of course a completely marginal amount," Laisk said.
Although there will be somewhat greater flexibility in reallocating money, municipalities' obligations will remain the same.
"Financial autonomy should mean that municipalities gain free resources. That will not happen on a larger scale in the coming years because even if the money is no longer earmarked, both legislation and the government continue to assign obligations to municipalities and fulfilling those obligations is mandatory. The budget must always contain the necessary line items to ensure all those obligations are met," said Tallinn Mayor Mihhail Kõlvart.
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Editor: Marcus Turovski
