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21st March 2021, Skopje – Fiscal decentralization has significant influence on the economic development, i.e. developed countries exhibit, on average, higher level of fiscal decentralization compared to the developing countries. We are a country with medium degree of fiscal decentralization, therefore we need to work on its strengthening. Thus, we propose a reform comprising three pillars aimed at strengthening the fiscal capacity of the municipalities, their cost-effective operations and increased transparency, Minister of Finance, Fatmir Besimu, wrote in his article dedicated to fiscal decentralization.

– Building sound and functioning public finance system is the cornerstone for sustainable economic growth. Fiscal decentralization process is part of that system. As mentioned above, many reviews show positive correlation between the degree of fiscal decentralization and the level of economic development. Average degree of fiscal decentralization in the developed countries is higher in relation to the one in the developing countries. Economic development in most of the transition countries is also usually linked with the increase of the degree of decentralization. However, this positive correlation is also conditional upon the institutional, i.e. the fiscal capacity of the local government, which, in the case of our country, can be an inverse factor as well to this positive correlation without having the matching local government’s capacities. Nonetheless, there are exceptions, as well as different models of fiscal decentralization, which also depend on the levels of government, Besimi wrote.

He points out that should one analyze the recent available data of the Organization for Economic Cooperation and Development (OECD) on share of revenues at local level (local government units (LGUs)) in GDP, it can be noted that, as regards Europe, Sweden exhibits the highest share of local revenues in GDP – 16%, followed by Finland and Denmark with 14.79% and 14.12% respectively, Iceland with 11.7% and Norway with 9%. In 2019, share of LGUs revenues as percentage of GDP in the Republic of North Macedonia accounted for 5.4% (according to the data on GDP revised by the State Statistical Office). Compared to the countries in the region, analyzed according to Report of the Network of Associations of Local Authorities in SEE (as per the preliminary data on RNM, its degree of fiscal decentralization is 4.9%), fiscal decentralization is lower in relation to Bosnia and Herzegovina (4.5%), Albania (3.6%), Turkey (3.5%) and Slovenia (4.7%), but higher compared to Croatia (7.4%), Montenegro (6.5%) and Kosovo (7.7%). On the other hand, share of LGUs revenues in GDP in the case of Western Balkans is 5.6%, being by 5 percentage points lower compared to the EU average (10.6), Besimi wrote in his article.

Minister of Finance underlines that for the purpose of strengthening the fiscal decentralization, many activities and measures are envisaged, grouped in three pillars: improved fiscal capacity and increased municipal revenues, strengthened fiscal discipline and transparency, and accountability.

The first pillar, or improved fiscal capacity and increased municipal revenues, will be implemented through activities which envisage increase of the funds distributed to the municipalities on the basis of collected fees in the central Budget, increased own revenues of the municipalities and establishment of funds to support the good performance.

The second pillar, aimed at strengthening the financial discipline of the municipalities, arrears repayment and cost-effective operations, envisages activities aimed at measures for planning the actual revenues and expenditures of the municipalities, rationalizing the operations and reducing the unnecessary expenditures, regular servicing of arrears, strengthened financial discipline, procedures on declaring financial instability, issuance of municipal bonds and analysis of the existing arrears of both the municipalities and the public enterprises.

As Besimi wrote in the article, for the purpose of increased transparency and accountability, i.e. within the third pillar of strengthening the fiscal decentralization, government oversight will be enhanced, in particular by the Department for Public Sector Financial Inspection in terms of the Law on Reporting and Recording Liabilities and reporting non-compliance with the Law on Financial Discipline, measures will be adopted with respect to increased transparency at the municipalities by announcing the financial reports in a transparent and understandable manner, and activities will be undertaken for the purpose of strengthened accountability when using budget funds.

Also available in: Macedonian Albanian

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