Boštjan Brezovnik

Financing local government in Slovenia

Financial resources are of essential importance for optimal local government functioning. Without a sufficient level of autonomy and resources, fiscal federalism is nothing more than an external appearance. With only one lower tier of government (municipalities), Slovenia is among the countries with a relatively low degree of decentralisation. The share of local finance amounts to around 5% of GDP (EU around 12%). Although the law allows creation of more lower tiers, no such units have been created yet. There are currently 193 municipalities, varying greatly in terms of population. Most of the local financial model discrepancies derive from: a) an inappropriate vertical tax structure and low level of local fiscal autonomy, b) an inadequate system of financial equalisation that is a strong disincentive to revenue mobilisation, c) absence of correlation between normative and actual expenditure/revenue, disregarding local characteristics, wealth and tax base, d) politically enforced decisions to found some ‘fictitious’ units, consequently reducing the role of local officials in political bargaining and lobbying.

An Analysis of the Applicable System of Financing the Municipalities in Slovenia

This paper examines the compliance of the system of financing the local self-government in Slovenia with the basic principles of the theory of decentralisation, and with the guidelines of the European Charter of Local Self-Government, thereby focusing primarily on the level of coverage of costs within the municipal competence by using the allocated appropriate expenditure resources. We ascertained that, overall, during the observed period from 2007 to 2009, the Slovenian municipalities were adequately supported financially because average expenditures were around 9% lower than the appropriate expenditure resources. Major system anomalies were detected in a micro-analysis of selected groups of municipalities, especially through a relatively large range between the lowest and highest costs. The range was between €319 and €1,167 per capita (an average of €527). A similarly great range was perceived also in the appropriate expenditure amount (between €416 and €1,196 with an average of €558), and in the index of resource coverage with expenditures where the range was between 0.50 and 1.75 (an average is 1.09). In spite of the fact that there were fewer than 15% of the municipalities that fell under the threshold categories, the sustainability of the entire system worsened due to the cross-impact effect when a relatively small amount of appropriate expenditure belonged to some municipalities with high costs. This was especially evident in the case of urban municipalities. Thus, urban municipalities recoded, on average, up to +13% more costs with an average of 26-percent smaller value of the appropriate expenditure amount.