Improving mechanisms of implementation of the concept of budget decentralization in Ukraine

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Posted on:Dec 5,2018

Annotation. The article considers mechanisms of implementation of the concept of budget decentralization in the aspect of their improvement in view of the current trends in the formation of intergovernmental fiscal relations and international experience. Within the framework of the study, an analysis of each of the mechanisms of implementation of the concept of budget decentralization, enshrined at the legislative level, and proposed ways for their improvement. The problems of formation of local budgets in territorial communities and intergovernmental fiscal relations between state and local budgets are considered in view of their current state.

It is stated that at the national level the problems of decentralization in general and budget decentralization in particular are identified, as reflected in the “Concept of reform of local self-government and territorial organization of power in Ukraine” and the ways of their solution are indicated. 

Key words: finances, financial resources, decentralization, local self-government, local budgets, budget decentralization, concept of budget decentralization, mechanisms of implementation of budget decentralization.

Problem statement

The reform of local self-government in Ukraine over the past few years has been manifested primarily in decentralization, which also spreads to the sphere of budgetary relation like in other European countries (Zéman, Z., Bethlendi A. & Lentner C.)

Budget decentralization generally provides for the creation of conditions for the financial autonomy of local budgets with their minimal support for the financial resources of the state budget. However, the practice of introducing budgetary decentralization mechanisms based on the Concept for the reform of local self-government and territorial organization of power in Ukraine has shown the need to clarify a number of its provisions in order to create the most effective mechanisms for decentralization of budget relations at the level of territorial communities.

And this necessitates a scientific analysis of the mechanisms of budget decentralization aimed at improving them and bringing them into line with the realities of modern social relations in the field of local self-government, including taking into account international experience in this sphere.

Research rationale is confirmed by the low degree of disclosure of mechanisms for implementing the concept of budget decentralization in the context of reforming intergovernmental fiscal relations and the need to identify areas for improvement of such mechanisms that should promote the financial provision of financial resources of territorial communities.

State of research

Issues of the budget system in the conditions of decentralization, including fiscal, in their writings are touched by such scholars as V.G. Bodrov, T.O. Buturlakina, O.I. Vasilieva, G.V. Vozniak, O.P. Kyrylenko, A.P. Lelechenko, Z.M. Lobodina, G.S., C. Lentner, Lopushnyak, M.V. Lyvdar, V.S. Kuibida, I.O. Lunina, S.A. Romanyuk, Z. Zéman, A.F. Tkachuk, G.Ya. Shakhov and others Among foreign scholars should be mentioned Sh. Blankart, G. Bivalets, M.J. Buchanan, R.A. Masgrave, Ya. Kuliavik, etc.

Directly the question of mechanisms for implementing the concept of budget decentralization was the subject of scientific research of O.M. Boryslavskaya, I.S. Volokhova, C. Lentner, V.M. Gaman, M.V. Goncharenko, Yu.S. Grinchenko, Ya.M. Kazyuk, O.P. Kyrylenko, Z. Zéman, O.Yu. Lysenko, O.V. Onishchenko, S.A. Romanyuk, M.O. Ruban, A.Yu. Yakymchuk, V.V. Yaroshchuk, etc.

However, the works of all the above-mentioned scholars do not reveal totally all the components of the mechanisms for implementing the concept of budget decentralization, as well as a significant part of them does not fully take into account the current trends of decentralization, given the financial conditions of local budgets, adapting to the new rules of intergovernmental fiscal relationships.

The purpose and objectives of the article are to analyze the mechanisms of implementation of the concept of budget decentralization in view of the approaches of their improvement, which should correspond to the current trends in the development of intergovernmental fiscal relations in a context of decentralization.

Presentation of the main material

The conceptual foundations of budget decentralization were laid down in the norms of the Constitution of Ukraine (The Constitution of Ukraine dated June 28, 1996 No. 254k/96-VR), the articles of which guarantee the right of territorial communities to local self-government and the independent resolution of issues of local importance. And in the future, they found their implementation based on the norms of the Law of Ukraine “On Local Self-Government in Ukraine” (On Local Self-Government: Law of Ukraine: No. 280/97-VR dated May 21, 1997), which enshrines the possibility of association of territorial communities, which was detailed in the Law of Ukraine “On voluntary association of communities” (On Voluntary Association of Communities: Law of Ukraine: dated May 05, 2015 No. 157-VIII).

The encyclopedia of public administration defines: “Decentralization is a way of territorial organization of power, in which the state transfers the right to make decisions on specific issues or in a specific area of ​​the structures of the local or regional level that are not part of the system of executive power and are relatively independent of it, is a complex, comprehensive phenomenon in a legal, democratic state, which consists in the transfer by a central authority of a certain amount of power to lower-level management entities having necessary rights, duties and resources “( The Encyclopedia of Public Administration in 8 volumes. Volume 8: Public Governance 2011, p. 167). And such a transfer must be properly regulated by the current legislation and have a solid financial basis that would allow local self-government bodies to carry out their own and delegated powers at an appropriate level.

In order to achieve the goal of implementing the decentralization legislation envisaged by the Cabinet of Ministers of Ukraine in 2014, the Concept of the Reform of Local Self-Government and Territorial Organization of Power in Ukraine was approved, the purpose of which is to determine the directions, mechanisms and timing of the formation of effective local self-government and territorial organization of power, as well as the coordination of interests of state and territorial communities (On Approval of the Concept of Reforming Local Self-Government and Territorial Organization of Power in Ukraine: Order of the Cabinet of Ministers of Ukraine No. 333-r dated 01.04.2014). This Concept identifies a number of problems related to the reform of local self-government bodies, one of which is the low financial capacity of a number of local government budgets, which entails the need for allocation of subsidies for them at the expense of the state budget.

Since the beginning of the decentralization reform, the situation has changed for the better, but local budgets have not received full financial independence. Thus, according to the report of the Accounting Chamber of the Verkhovna Rada of Ukraine “On the results of the analysis of the formation and use of intergovernmental transfers from the State Budget of Ukraine to local budgets in 2016-2017 years” it is stated that the increase of the revenue base of local budgets has been achieved only partially, which is primarily due to insignificant volumes financial resources derived from fiscal sources. There are also deformations in the distribution of intergovernmental fiscal transfers in favor of the state budget (On the Results of the Analysis of the Formation and Use of Interbudget Transfers from the State Budget of Ukraine to Local Budgets in 2016-2017: Report of the Accounting Chamber of the Verkhovna Rada of Ukraine dated April 24, 2018 No. 11-1, p. 27), which reduces the financial resource base of local budgets in the form of own revenues. And they have to be satisfied with transfers, including from fiscal revenues, which are transferred from the state budget.

Possible solution of this problem in the aforementioned Concept is indicated as creation of proper material, financial and organizational conditions for ensuring the implementation of own and delegated powers by local self-government bodies, which should be carried out in compliance with a number of principles, among which:

  • availability of resources required for the implementation of the powers of local self-government determined by law;
  • calculation of the level of equalization grant based on unified standards for the provision of public services;
  • transferring transfers from the state budget directly to each local budget;
  • determination of the financial basis for the exercise of local authority self-government powers of taxes and fees that are related to the territory of the respective administrative-territorial unit;
  • prevention of the provision by other bodies of local self-government and executive authorities of tax privileges that reduce local budgets’ own revenues. Privileges from local taxes and fees may be established only by the local self-government body, whose budget includes such taxes and fees;
  • providing local governments with access to attracting credit resources for investment development by simplifying procedures for coordinating borrowings and local guarantees and balancing them with state control methods aimed at preventing bankruptcy of municipal property rights objects (On Approval of the Concept of Reforming Local Self-Government and Territorial Organization of Power in Ukraine: Order of the Cabinet of Ministers of Ukraine No. 333-r dated 01.04.2014).

All this should in all respects promote the budgetary autonomy of local self-government bodies by providing an independent financial basis for the functioning of territorial communities. At the same time, some of these points are still far from their final implementation, and require a more integrated and balanced approach.

As noted in this regard M.V. Goncharenko: “Legislative consolidation of the expanded list of own revenue sources of local budgets, allocation of significant amounts of budget funds in the form of intergovernmental transfers and funds of the State Fund for Regional Development, as well as expansion of opportunities for attraction of additional financial resources are not sufficient conditions for community development and do not mean automatic quality improvement of public services on the ground “ (Honcharenko, 2017, p. 6). This is primarily due to the activities of officials of local self-government bodies, which should take care of the territorial community to promote its resource base, improve the climate of business and invest in objects in its territory.

The processes taking place in the world and national economies are encouraging the development of new approaches in the field of legal regulation of intergovernmental fiscal relations in our country. In particular, this applies to the programmatic target budget financing method which is, to the quite right thought of Y.M. Kazyuk, is a tool for ensuring both budget planning and performance of its indicators and providing services to the population at a high quality level, as well as the transition from keeping budget institutions to optimal use of budget funds; achievement as a result of significant economic and social effects and increase public awareness about the effectiveness of spending the budget of the territorial community and guaranteed social services (Kaziuk, Ya.M., 2014, p. 271).

And such approaches should first of all be manifested through the mechanism of financial stimulation of local self-government to the development of their territorial communities.

In relation to this issue A.Yu. Yakymchuk and V.V. Yaroschuk noted that decentralization of power and the reform of local self-government should include a set of measures aimed at streamlining relations in the field of financial independence, and this will enable local communities to motivate rational and efficient use of budget funds (Yakymchuk A.Yu. & Yaroshchuk V.V., 2017, p. 141), which they themselves will form at their own sources of income, rather than receive subsidies from the state budget.

Consequently, the responsibility of the territorial community administrations for the effective use of available budgetary resources should be introduced and opportunities should be introduced to stimulate work to increase its own resource base of territorial communities, in particular by 100% deducting taxes from newly created, on their territory, economic entities into budgets of such communities.

In this context, it is advisable to indicate the position of S.A. Romanyuk, according to which financial responsibility is the main component of decentralization. And in order for local governments and private organizations to perform their decentralized functions efficiently, they must have an adequate amount of revenues collected in or out of a given territory from central government as well as cost decision-making powers (Romaniuk S. A., 2018, p. 19). Such a combination of budgetary financial resources and budgetary authority on their spending will enable the responsible authorities of territorial communities to be properly accountable and will be an additional incentive to increase incomes within each of them.

An important issue is the volume of subsidies to local budgets, which are provided from the state budget, since at present, without financial support, local budgets, including local self-government budgets, cannot independently resolve all the tasks entrusted to them in the financial plan. In this regard, V.M. Haman notes that in the aspect of budget decentralization for Ukraine, as well as for most developing countries, there is a strong targeted policy of the central government, in which the administrative-territorial units are assigned the role of executing the center’s strategy. And there is a controversial situation in which it is necessary to provide public services efficiently where the central budget delegates its spending powers to lower budgets in the context of a strict centralization of tax revenues (Haman V.М., 2013, p. 131). Thus, a redistribution of financial resources, primarily of a fiscal nature in favor of local budgets, is needed.

On the other hand, one cannot but agree with the opinion of M.O. Ruban, based on the analysis of factors that reduce the possibility of increasing the proportions of taking part of national taxes into local budgets, can be distinguished such as the sectoral structure of the economy in the interregional section, the significant differentiation of wages, demographic structure of the population, its density and labor migration, volumes consumption, different cost of providing public services in the regions (Ruban, M.O., 2018, p. 104). That is, even the directing of fiscal proceeds in the community to local budgets cannot be a guarantee of their proper financial support due to objective factors of different levels of economic development of territories and different volumes of expenditures borne by local self-government bodies to fulfill their powers. Therefore, state support in the form of subsidies from the state budget is necessary.

As G.V. Vozniak noted in this regard: “The priorities of the concept of development of local budgets in the context of decentralization are as follows: increasing the internal potential of socio-economic development of regions on the principles of financial decentralization; fiscal stimulation of the competitive advantages of the regional economy; reduction of territorial asymmetries in budgetary provision of regional development and equal access of the population to high-quality public services “ (Vozniak H.V., 2017, p. 431). However, the implementation of these conceptual foundations requires considerable time and financial investments in the regional economy both from the state budget and from private investors, for which a favorable investment climate should be created. And as W. Oats, J. Sellers and A. Lidström (Sellers J.M. & Lidström A., 2007, p. 609-632) rightly pointed out, decentralization should take into account the financial and economic potential of each region and community to determine how best to provide them with financial support. And this will make it possible to find the most optimal mechanisms of budget decentralization for each territorial community.

One cannot overlook the issue of mechanisms for granting privileges to economic entities, especially with regard to mandatory payments. As O.M. Pidkhomnyi and O.Yu. Zhurba noted, as shown by the practice of applying the method of regulation of local budgets in the form of extraction of surplus budget funds to a higher-level budget and the application of individual approaches to setting rates of deductions from national taxes and fees, has many disadvantages: it not only negatively affects the revenue base of local budgets, but and deprives local authorities of incentives to increase their incomes (Podkhomnyi O.M. & Zhurba O.Yu., 2017, p. 1269). When transferring the privileges indicated, it should be noted that they have similar effects on local budgets.

That is why such privileges should be provided primarily by the territorial community management bodies, taking into account factors of financial provision of such a community budget on the one hand and the need for financial support of separate economic entities on the other. Transferring such powers to higher levels of local self-government or government may negatively affect the fullness of local budgets. At the same time, it is necessary to take into account the necessity of applying privileges for certain, clearly defined economic entities, at the national level or at the level of local self-government, which should be reflected in the legislation.

The attraction of resources by borrowing by local government bodies is also an important component in the mechanism of financing local budgets. However, this mechanism has significant limitations in view of the subjects of its use and source of origin of such resources, which adversely affects the ability of local communities to borrow.

In this regard, appropriate is the opinion of A.E. Bryazkalo that the increase of the role of local budgets would make it possible to use borrowed funds more efficiently, to direct support for domestic producers, to stimulate them in addition to obtaining financial resources for the purpose of entering foreign markets, which would ultimately contribute to the overall economic revival of territories (BriazkaloA.Ye., 2016, p. 101). Indeed, expanding the use of borrowing by territorial communities should encourage additional sources of funding, but account should be taken of the nature of the payment, the turnaround and timeliness of such financial resources and the need for financial control over the extent of their involvement and purposeful use.

Finally, one should pay attention to the general approach to the question of the concept of budget centralization, which finds expression in the scientific position of O.V. Onishchenko and Yu.S. Grinchenko according to which state and local budgets should be bound by transfer mechanisms to such an extent that local finances do not lose their autonomy, and the national mechanism of intergovernmental fiscal relations has been effective (Onyshchenko S.V. & Grinchenko Yu.S. 2017, p. 48). That is, the mechanism of implementation of the concept of budget decentralization should be constructed taking into account the autonomy of local budgets and ensuring the overall manageability of the budget system in the state as a whole.

Conclusions

At the national level, the problems of decentralization in general and budget decentralization in particular are identified, which is reflected in the “Concept of the reform of local self-government and territorial organization of power in Ukraine” and the ways of their solution are given. However, the tendencies of local government development and the practice of budget decentralization implementation point to the need to improve the mechanisms of implementation of the concept of budget decentralization. The approaches should be as follows:

  • application of the mechanism of financial stimulation of territorial community management bodies by providing them with resources derived from their productive activities, in particular income from mandatory payments paid by newly created entities on their territory;
  • improvement of the mechanism of the responsibility of the territorial communities’ administrations for the effective use of available budget resources, by combining budgetary financial resources and budget powers for their spending;
  • introduction of a mechanism for the redistribution of financial resources, primarily fiscal in favor of local budgets;
  • introduction of a mechanism for taking into account the economic potential of each territorial community in order to determine the size of the donations from the state budget;
  • application of the mechanism for the transfer of rights to introduce privileges for compulsory payments for economic entities for territorial communities, except for benefits for specially designated economic entities;
  • improvement of the mechanism of using borrowings by territorial communities to receive additional sources of funding, taking into account the need for financial control over the scope of their involvement and purposeful use.

The prospect of further research seeks detailed analysis of each of the mechanisms for implementing the concept of budget decentralization on the subject of legislative regulation of the introduction and practical implementation of intergovernmental fiscal relations in Ukraine.

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Svitlana Diachenko,
Doctoral Candidate, PhD, Associate Professor of economic policy and governance department of the National academy for public administration under the President of Ukraine National Academy of Public Administration under the President of Ukraine