Rapporteur: Dr Gerhard ENGEL (Germany)
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EXPLANATORY MEMORANDUM
Introduction
On 5-7 October 2000, the Congress of Local and Regional Authorities of Europe (hereinafter the CLRAE or the Congress) and the Directorate of co-operation for local and regional democracy of the Council of Europe held together with the Congress of Municipalities of the Russian Federation, the Ministry of Federal Affairs, Nationalities and Immigration Policy of the Russian Federation and the Government of the City of Moscow an international conference on financial relations between federal government and regional and local authorities in European federal and highly regionalised states.
Some 100 participants - local and regional elected representatives and government officers, representatives of national associations of local and regional authorities and federal and regional ministries as well as representatives of scientific community from a number of European federal states took part in this conference.
The conference was designed to enlarge and further thinking on financial relations in federal, quasi-federal and highly regionalised countries in Europe as a continuation of the work which the CLRAE began in 1999 with monitoring visits to the Russian Federation, the Ancona conference on responsibilities and finances of local and regional authorities, and CLRAE adoption of Recommendation 64 (1999) (and the report) on the state of local finances in Germany and Recommendation 79 (2000) (and the report) “The financial resources of local authorities in relation to their responsibilities: a litmus test for subsidiarity”.
The reports on financial relations between the various tiers of local government in federal states (Austria, Belgium, Germany, the Russian Federation and Switzerland) and in highly regionalised countries (Italy and Spain) as well as in some of the regions of these countries were presented to the participants.
In addition to the country reports various issues common to all federal States in Europe were considered during the conference with regard to the financial relations between three tiers of government in federal states. For instance, the participants considered such a core issue involved in any delimitation of responsibilities between territorial authorities, as the conflict between the need for internal and external budgetary discipline, on the one hand, and responsibility both for the entire region and the local authorities, on the other. The problem of concomitant financing was explained with reference to the experience of Austria, and Germany, with two contributions, on Thuringia, which is one of the “new” Länder and probably has the most far-reaching arrangements of all the German states, and the second on Baden-Württemberg, one of the “old” Länder.
The conference also focused on the specific problem of delegated functions and the interfaces at which the interests of two or more administrative levels meet. Here, the federal state's constitutional provisions relating to finance must attempt to strike a balance between the interests of the higher territorial authorities and the requirements of local self-government.
In this respect, it was noted that in recent years in a number of European federal States a certain erosion of local and regional autonomy has resulted from transfer by Federal State to regions and local authorities of a significant number of new and/or delegated responsibilities without any adequate financial compensation. In my view, one solution to this problem would be strict implementation of the so-called principle of connection as pointed out in the final declaration of the conference.
Special attention was paid to the report on the state of local self-government and budgetary relations between the regions and the municipalities in the Russian Federation, presented by Professor Gérard Marcou as a part of the ADACS Local Authorities Programme.
The timing and the venue of the conference could hardly have been be more appropriate, because important changes were taking place in the relations between the constituent elements of the Russian Federation. These changes have mainly taken place in the relations between the federation and the individual "Subjects" (ie, constituent bodies) but also in those between the local authorities and the Subjects on the one hand and the federation on the other. This changes inevitably have repercussions, especially of a budgetary nature, for the local government units.
At the end of the conference the participants whilst noting that there had been some progress with regard to financial relations, pointed out substantial difficulties over transparency and maintaining a balance in financial relations between the three tiers, in particular, though not only, between the regions and the municipalities.
The European Charter of Local Self-government as a guarantee of financial autonomy of local authorities
All discussions at the conference referred to the European Charter of Local Self-government (hereafter : Charter). The Charter must be seen in connection with the subsidiarity principle, according to which it is initially assumed that the lowest administrative entity, ie the local authority, has the competence to take a particular decision for a given geographical area. Only when the next highest authority proves that a decision has an impact beyond the limits of one administrative tier should this authority assume the responsibility for taking it. The result is that decisions at all levels are taken as close to the citizen as possible and then politically endorsed in democratic elections (democratic accountability).
The rigorous implementation of the subsidiarity principle requires that the central government should not interfere at its own discretion in the responsibilities of the subordinate territorial authorities and that these administrative tiers should possess financial (ie, budgetary) autonomy. It should interfere only when the unity, defence, security, social and economic cohesion of a state make it necessary to have legal provisions with no territorial limitations is there scope for the federation to enact framework legislation, and this also applies mutatis mutandis to the relationship between a constituent state, republic or region and the local authorities.
At the European level, the subsidiarity principle has now been widely accepted by the member States of the Council of Europe. In my view as a rapporteur, it should be given a strict interpretation in the case of a federation divided into several states because it is not only important politically but also extremely significant economically. Thus, from a political point of view constituent entities legislation and administrative system must comply with the principles of the Charter. From the point of view of efficiency, the ideal solution would be to allocate responsibilities according to the economic effects of individual decisions, since it would then be possible to minimise the external effects that have been brought about by these decisions and cannot be internalised within the same administrative tier. This would not least also encourage political decisions to be more rational, because both the positive and, in particular, the negative effects of decisions would also be felt by those who have to justify and assess such decisions directly or indirectly before or after elections are held. When decision-makers experience positive or negative affirmation, this meets the frequently made demand for them to be made accountable for their decisions. It also corresponds to the democratic principle from which this call for political accountability can be derived.
With regard to financial autonomy of local authorities, in particular, these principles also form the basis of the European Charter of Local Self-Government .Articles 3, 4 and 9 of the Charter deal with the basic democratic structure of the real powers derived from them and the financial autonomy to which the local authorities are entitled. The participants at the Moscow conference agreed and it has always been repeated by the Congress that only compliance with these rules creates the preconditions for, and provides a guarantee of, local self-government. The fact that it has in the meantime been possible to achieve a broad consensus on this in Europe becomes clear when we realise that the vast majority of Council of Europe member states have signed the Charter and most have ratified it.
It was highlighted that one of the essential preconditions for local self-government is the creation of the financial basis laid down in Article 9 of the Charter. In particular, this means providing the subordinate territorial authorities with the means of obtaining their own revenue, without which they cannot carry out their functions autonomously. These own resources should provide scope for them to engage in their own, voluntary activities. There is no public activity that does not directly or directly entail financial consequences. There should basically be no doubt that decisions at state, regional or local level always involve costs, which partly have to be paid by the state and partly by the citizens at local and regional levels. However, these costs are all too often denied or underestimated when they do not have to be borne by the decision-maker. Here the main issue is the permanent complaint by the local authorities and local authority unions that they are assigned functions from above without the necessary funds to carry them out. This leads us to the frequently cited "principle of concomitant financing" or principle of “connection” mentioned above, which can be explained by adapting a well-known saying: "he who calls the tune must pay the piper". Many local authorities and local authority associations in Europe are calling for this to be made an enforceable provision of the constitution or at least to enshrine it in ordinary law. This is closely connected with the desire to be involved in the decisions of superior bodies or at least to have the right to be heard in advance. In my view the Congress as a body representing local and regional councillors should back up these calls.
The conference pointed to possible solutions as well as the problems and inadequacies in the various federal or quasi-federal states in Europe. The focus was naturally put on the local authorities' political and, in particular, financial autonomy and the financing of their budgets, whether it be by means of their own revenue (preferably their own taxes or taxes shared with other authorities) or grants made by central government bodies to use more or less as they wish.
Own taxes
It would be an ideal solution if each administrative tier were to be provided with its own taxes and levies within a tax system in such a way that the yield more or less corresponds to its responsibilities and financial requirements. Fluctuations in these requirements could then be compensated for via the tax rates. In particular, the local authority would then be able to fix the local rate. As far as the bases for their assessment are concerned, a number of factors would seem to militate in favour of laying the essential elements down in a framework law. This will usually be the case when the taxes permitted within the state territory are defined in the constitution or by ordinary laws enacted by the central government. At the conference we noted that this is a subject of heated debate not only in the Russian Federation, but in Germany too, for instance, where the local authorities are fighting for their "right to levy taxes".
The system of separating each tax by allocating it to a particular administrative level, has an economic function that goes beyond the financing of a budget. Via the interplay of the tax burden on the one hand and the public services financed with it on the other, there will be competition between the Subjects and the local authorities for the ability to impose taxes on and provide services to residents and companies, which, if all parties have equal opportunities to compete - and this is an important precondition - would have to be welcomed. Such competition would make it clear where the citizens would prefer to move to. Those adversely affected by the decisions of a territorial authority, whether it be the population or business enterprises, could vote with their feet and if the structural differences and wealth disparities between the regions and between the local authorities are too great this will distort such competition to the detriment of the weaker authorities. As it was pointed out at the conference, the freedom to levy taxes should not preclude solidarity measures and economic policies designed to reduce economic and social imbalances nationally or regionally. These measures could be implemented by an appropriate combination of vertical and horizontal equalisation.
Shared taxes
When deciding on the taxes to be levied, the central authorities should be allocated those where the yield is subject to considerable fluctuations and which are paid by as large a group of taxpayers as possible. The opposite should be the case for the subordinate authorities because they, in particular, would otherwise be dependent on the economic situation in their budgetary planning without having any economic policy instruments at their disposal, and therefore without being able to respond to economic changes. This would also unnecessarily aggravate the problem of financial equalisation. As it is difficult to allocate the levying of taxes in this way, the taxes with a particularly high yield will often have to be shared between the authorities (whether by means of fixed or variable distribution formulae) in order to be able to respond to the changes or fluctuations in financial requirements that occur among the administrative tiers involved. This is, of course, a wide area for potential conflict and there are dangers lurking for local self-government here.
The principle of shared taxes complies with article 9 of the Charter provided that allocation and distribution of tax rates is fixed by law and based on objective economic criteria reflecting local tax base.
Transfers (grants)
As it is hardly likely to be possible to base the entire financing of the local authority budget on the authority's own revenue, a more or less substantial proportion of its requirements will have to be covered by grants from the higher territorial bodies or, in the case of the regions, either from central government grants or payments under the regional financial equalisation scheme.
According to the Charter, the bulk of these transfer should be in the form of general grants that are not tied to a specific purpose and which the local authorities are free to use for the functions allocated to them, and only a small percentage should be earmarked for the compulsory duties necessary to guarantee uniform services within a state or to carry out a supraregional project. The existing European financial equalisation schemes try, mainly through transfers in the form of vertical financial flows (that is to say, grants based on financial requirements and not earmarked for a specific purpose), to reduce the differences between financial capacity and financial requirements in accordance with fixed rules that apply to everyone (vertical equalisation with horizontal effect), since horizontal revenue-sharing systems involving substantial payments by the richer authorities into a fund from which the poorer ones are paid are more or less doomed to failure owing to political resistance and the attempts by those expected to pay to avoid doing so. Horizontal financial equalisation therefore plays a less important role. In the case of vertical financial flows, it is not only important to have uniform procedures but also to limit the conditions for allocating them to a few criteria since there will otherwise once again be scope for manipulation in the case of discretionary decisions.
Earmarked grants reduce per se the autonomy of the lower territorial authorities and allow the higher bodies that make them, take discretionary decisions, which could be seen as incompatible with the principles of local self-government. Attention should at least be paid to ensuring these grants are distributed in accordance with no more than a few objective criteria. This also applies to the investment funds and special funds that are frequently to be found attached to the various ministries and which the politicians at national level like to reserve for their own "clients", ie the voters in their own constituencies.
Financial relations between the State, regions and communes in the Russian Federation.
At the conference, the participants considered the principles of local and regional self-government and their application to the specific conditions prevailing in Russia, basically from a financial point of view, which is fairly well described by the term "asymmetric federalism". The term “asymmetric federalism” captures in a nutshell the specific features of a country like Russia, which is characterised by its continental vastness and the unimaginable ways in which it differs from Europe, not only in its history, topography, climate, ethnic composition and settlement density but also its infrastructure and industries. These factors lead to the economic and financial differences that manifest themselves in particular in the extreme variations in per capita gross domestic product. It was noted that while in the reunited Germany the richest "old" Länder in the south of the country are about twice as prosperous as the poorest Land in eastern Germany (Mecklenburg-Vorpommern), in Russia the differences can be assumed to be more than 20 to 1 at the level of the Subjects alone. This means that we are not only dealing with different quantitative but also qualitative conditions, which also make it extremely difficult to transpose the experience gained by the other federal Council of Europe member states to Russia. Whenever a proposal is made to solve the problem of reorganising the system of financial equalisation in the Russian Federation it is necessary to consider the differences between the Subjects, including their size and very divergent political and constitutional structures, and the different ways in which they implement the changes intended for the federation as a whole, where differences even exist in the extent to which the individual Subjects have set up units of local self-government worthy of the name. Somewhat less important than this general problem are the differences of a more economic and socio-economic nature, which naturally dominate the consideration of financial and budgetary issues. Whether these differences lie in the degree of regionalisation within a Subject of the Federation, in the size of the budget, in the budgetary structures or the urgency of investment in infrastructure (including health and education), it is always necessary to be aware of this specific problem in each region.
In the Russian Federation, financial equalisation between the Subjects and local authorities within each region has quite a different importance from the countries of western and central Europe. The establishment and implementation of minimum standards for public services under these revenue-sharing arrangements is a crucial problem, even if the constitution defines the creation of similar living conditions for everyone as an objective to be achieved. Incidentally, the German constitution does this too. After each financial-equalisation exercise has been carried out, there will still be poor and rich Subjects of the Federation, as there will be prosperous and impoverished local authorities within them. It must be the task of every realistic revenue-sharing scheme to reduce these differences to a politically tolerable level.
This will be a difficult and politically delicate task in view of the big differences existing in the Russian Federation. It can be said from the outset that, under these more difficult conditions, the efficient way to solve the problem is not centralised administration but a system that is based on a few objective criteria, which can be manipulated as little as possible and dispenses with too great a redistribution of resources between the Subjects and provides favourable conditions for the self-governing bodies to develop, because these authorities take decisions close to the citizen and do so much more efficiently than central authorities could ever manage to do, even with the best will in the world.
However, as in all countries in transition there is a temptation to fall back on the old and familiar system of concentrating power with the central government and to justify this by reference to the indisputable fact that there is a lack of resources as well as qualified staff at the local level. The more rational response to this is the provision of initial and in-service training, to which the Congress of Municipalities of Russia also repeatedly refers. The transition can only be successful if those concerned work unswervingly to create the basic conditions for self-government, which include not only the training of staff but also the restitution of property to the local authorities and the creation and implementation of the relevant real-estate legislation, as well as the clear delimitation of responsibilities and power structures between the territorial authorities. In such a large and diverse country as Russia, the central government tasks could be confined to those functions which are designed to guarantee the unity of the country, its defence, security, social and economic balanced development and cohesion. In order to achieve this, however, the federation must enact laws that create the preconditions for the country's transformation and the local self-government that goes with it. However, the decisive factor is that these laws should be actually implemented. As experience in many transition countries shows, this can on no account be taken for granted.
Framework legislation that is drawn up by the federation and is limited to the essential aspects of a democratic federal state but formulated in a way that is binding on all concerned and can be enforced at law should allow the Subjects to find the appropriate solutions at their level for local self-government in line with the Charter.
After having heard how various European countries with a federal or quasi-federal structure deal with the issues of the distribution of responsibilities, finances and financial equalisation in the narrower sense the participants noted that none of these systems can serve as a main reference system for Russia, since many elements cannot be transposed, but a large number of individual solutions are nevertheless interesting or worth being taken into account. A repetition of some of the mistakes made in those countries should at least be avoided - ie, there should be no attempt to reinvent the wheel. The examples given at the conference indicated a number of specific solutions that might be worth considering for the Russian Federation as a whole or even only one or other of its constituent entities.
With regard to the question of the difficulties, experiences and expectations involved in the case of Russia's asymmetric federalism, for the towns and smaller local authorities, their relations with their Subject of the Federation are equally important - perhaps more important - than the relations between them and the Federation itself. Although, according to the Russian legislation, the Subjects are to a certain extent free to organise these relations with the local administrative units their legislation in this field must comply with the existing federal framework legislation and the Charter.
Conclusions
Conclusions adopted at the Moscow conference will not be the end of the debate since it should be continued at the various levels, whether it be in Russia, the individual federal states of the "old" Europe or within the CLRAE at the Council of Europe. As the problems confronting our states, regions and municipalities change, it will no doubt become a permanent dialogue in which the Congress should try to identify the best solutions in each case for our respective countries. I do hope federal, regional and local governments in Europe will pay attention to the conclusions reached in Moscow and will try to follow them.