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The financial resources of local authorities in relation to their responsibilities (Application of Articles 9 and 4, paragraphs 4 and 5, of the European Charter of Local Self-Government) - CPL (5) 4 Part II

With the agreement of the Committee of Ministers and on the basis of the explanatory report on the European Charter of Local Self-Government, the Congress assumed responsibility for the political monitoring of the Charter’s implementation in the signatory states.
It entrusted this responsibility to a working group for which we are the rapporteurs. The group, comprising 11 members of the Chamber of Local Authorities, is chaired by Mr Gerhard ENGEL (Germany) and assisted by a committee of independent experts, led by Professor Alain DELCAMP.

With a view to promoting compliance with the Charter’s provisions in the signatory states, the working group periodically selects one article or a series of articles whose practical implementation, it believes, should be the subject of a detailed report.

The working group itself chooses those articles relating to specific aspects of local self-government which are proving the most difficult to implement, and monitors their implementation.

II. THE FIRST THREE REPORTS ON MONITORING THE IMPLEMENTATION OF THE EUROPEAN CHARTER OF SELF-GOVERNMENT

In this context, the working group’s first report on monitoring the implementation of the Charter, of which Mr Jean-Claude VAN CAUWENBERGHE was rapporteur, considered in some depth the preliminary issues of the incorporation of the Charter in the legal systems of ratifying countries and the remedies available to local authorities in cases where the competencies of local self-government are violated by domestic laws. Moreover, a significant part of this first report was devoted to the conformity of legislation in the above-mentioned countries with the various provisions of the Charter.

After it had been approved by the working group, this report was presented (Italy) at the first plenary session of the Congress (31 May - 3 June 1994) by Mr Giorgio DE SABBATA. On the basis of the report and in accordance with the working group’s proposals, the Congress adopted Recommendation No.2 (1994) to the Committee of Ministers and Resolution 3 (1994). Hence, these texts represent the first result of the CLRAE’s monitoring of the implementation of the European Charter of Local Self-Government.

In its Recommendation No.2 (1994), the Congress noted that the Charter had been incorporated into domestic law in some countries, but not in others. It consequently requested the Committee of Ministers to study these issues and to inform it about the existence of procedures which local authorities could use to verify the conformity of domestic legislation with the Charter in countries which had ratified the Charter, whether or not it had been incorporated into domestic law.

The Committee of Ministers responded to this request by informing the Congress of its decision "to ask the Steering Committee on Local and Regional Authorities (CDLR) to provide it with the information it needed to reply to Recommendation No.2 (1994) on monitoring the implementation of the European Charter of Local Self-Government"

At its 16th meeting (Strasbourg, 6-8 December 1995), the CDLR adopted a report providing the Committee of Ministers with the information it needed to reply to the CLRAE’s Recommendation No.2 (1994). This report contains the information sent to the CDLR by 21 national delegations.

The Committee of Ministers submitted the CDLR's report directly to the Congress. In its Resolution No.34 (1996), the Congress took note of the CDLR's report and decided to submit it to the working group responsible for monitoring the implementation of the Charter, for more thorough examination.

The working group decided to undertake an analysis comparing the CDLR's report, which contained the replies of the various ministries responsible for local authorities, with the summary of information provided by members of the committee of independent experts and contained in the first report on monitoring the implementation of the Charter, drafted by Mr VAN CAUWENBERGHE in 1994.

On the basis of this analysis, the working group drew up a response as well as a draft recommendation proposing that the Committee of Ministers adopt a recommendation on the implementation of the European Charter of Local Self-Government, to be addressed to all ratifying countries. Ms DOGANOGLU (Turkey) and Mr LLOYD (United Kingdom), rapporteurs, presented these documents at the last meeting of the Standing Committee of the Congress (Strasbourg, 5 and 6 February 1998), which unanimously adopted the draft recommendation prepared by the working group.

At the same time as drafting this response concerning the Charter’s incorporation in the legal system of ratifying countries and legal protection of local self-government, which hence constitutes the working group’s third report, the group continued to monitor the implementation of the Charter. It thus prepared a second report on the monitoring of local authorities by central and regional authorities. On the basis of this text, at its 3rd plenary session (Strasbourg, 2-4 July 1996) the Congress adopted Recommendation No.20 (1996) on the application of Articles 3, 6.2, 7.1 and 8 of the Charter, which it submitted to the Committee of Ministers. On this occasion, the Congress also adopted Resolution 34 (1996) mentioned above.

In order to reply to this recommendation, the Committee of Ministers again requested the CDLR's opinion. At its 20th meeting (Strasbourg, 26-28 November 1997), the CDLR replied that the Committee of Ministers "could transmit to all member States the CLRAE Report on the application of all the above mentioned articles and that it would be possible to elaborate a draft recommendation of the Committee of Ministers to all member States concerning the control on local authorities' actions, giving consideration to the proposals in paragraph 9 of CLRAE Recommendation 20 (1996)".

This decision by the CDLR went even further than the recommendations of the Congress, which had merely asked that the above-mentioned texts be transmitted to all ratifying countries.

III. CONSIDERATIONS OF THE PROCEDURAL PROBLEMS ENCOUNTERED WHEN PREPARING THE FIRST THREE REPORTS WITH A VIEW TO IMPROVING THE SYSTEM OF MONITORING THE IMPLEMENTATION OF THE CHARTER

The procedure followed to prepare the first three reports on monitoring the application of the European Charter of Local Self-Government ensured a detailed, successful dialogue from beginning to end between the Congress, responsible for the political monitoring of the Charter’s implementation, and the Contracting Parties to the Charter, with the Committee of Ministers acting as intermediary.

Nevertheless, this process is weak in a number of areas. The first drawback is its length.

It should be borne in mind, however, that the Congress resolved this problem in paragraph 15a of Resolution No.34 (1996) on monitoring the implementation of the Charter. This paragraph proposes that the CLRAE seek the opinion of the CDLR before submitting a recommendation on the subject to the Committee of Ministers. At its 20th meeting (Strasbourg, 26-28 November 1997), the CDLR welcomed this proposal, which will therefore be put into effect for the adoption of the next Recommendation on monitoring the implementation of the Charter.

Another weakness of the system is the fact that, as was rightly observed at the Barcelona Conference on the application of the Charter by the Courts of Justice¹, its continued existence is not assured. The working group's survival depends entirely on the will of each Congress to renew its two-year mandate, while the committee of independent experts was not officially recognised until after the Copenhagen Conference which marked the Charter’s 10th anniversary, and does not have permanent status either. Even if a consensus emerged in favour of drawing the appropriate conclusions from the experimental by defined procedures, the question would remain of the form in which the system thus set up this way might be institutionalised (...).

An alternative might be the modification of the Charter of the Congress, which defines the conditions of its functioning and the various bodies which make it up. At present, the working group responsible for the monitoring the Charter is only one of the "ad hoc working groups" with "specific terms of reference" under Article 9. One could imagine an additional article being devoted specifically to the working group responsible for the supervision of the Charter's application. The group would thus obtain permanent status. This could also be done for the committee of experts, although the term of office of its members would of course have to be adapted according to the composition of the Congress. The experts, for example, could be officially appointed by the Bureau of the CLRAE. This would be a way of recognising the work already done and would avoid embarking on a procedure in which the governments of states (...).

The working group should become a permanent organ. Its chairman could be made a member of the Bureau of the Congress so as to ensure co-ordination with the supervisory system. This co-ordination is destined to become more and more important as the system of supervision on request develops. In addition, it is clear that co-ordination must also exist between the supervisory system and the different initiatives taken by the working groups responsible, under the terms of CLRAE Resolution 31 (1996), for drawing up reports on the situation of local and regional democracy in member and applicant states.

The committee of independent experts must undoubtedly be retained, even if its composition is reviewed in the light of such criteria as the Bureau of the Congress might make official on the proposal of the working group. Effective collaboration between the working group and the committee of experts would doubtless presuppose that the chairman of the committee of experts participate in the meetings of the working group, or even be consulted by other organs of the Congress (...).

It goes without saying that this institutionalisation would be doomed to remain a dead letter unless additional specific resources were allocated to the supervisory system. Tribute should forthwith be paid to the contribution made by the secretariat to the functioning of the present system, but it is clear that the development of the current process and even its maintenance requires that it be endowed with a permanent secretariat possessing sufficient resources.

The assistance of this secretariat is all the more important as there can be no question, a priori, of the working group or the committee of experts being resorted to too often, even though it will be more and more necessary to prepare a basic document, possibly in the form of a database, and to reply to the requests that will inevitably arise once the system is better known. It should be noted in particular that since the production of information booklets on the Charter, the secretariat has been receiving at least one request for information per day on the remedies available to territorial authorities.

IV. FOURTH REPORT ON LOCAL AUTHORITIES’ FINANCIAL RESOURCES IN RELATION TO THEIR RESPONSIBILITIES

The subject of the fourth general report on the Charter’s implementation was determined by the working group at its second meeting in 1996, when it immediately stressed the importance of local authorities’ financial resources (Article 9 of the Charter) with regard to their political and administrative autonomy. This was also the theme of the last Conference of European ministers in charge of local authorities (Lisbon, 10 and 11 October 1996). In the same context, the working group also considered the impact the introduction of the new single currency would have on local authorities in the European Union, whose resources might be cut to enable countries to meet the macro-economic conditions required by the Maastricht Treaty. It concluded that local democracy would cease to exist if financial resources were insufficient and that the fourth report should therefore be devoted to the issue of local finances.

However, the group thought that, in the light of these considerations, the practical application of two major articles of the Charter still needed further examination: Article 9 on local finances and Article 4 on the scope of local self-government. It therefore decided to examine the issue of local finances in relation to responsibilities.

On the basis of the above considerations, the working group officially selected the theme of local authorities’ financial resources in relation to their responsibilities (Article 9 in relation to Article 4 paras. 4 and 5).

By tackling this subject, the group began the third phase of its work on monitoring the application of the European Charter of Local Self-Government.

After its initial examination of the replies to the questionnaire on local finances submitted by members of the committee of independent experts, the working group selected a number of specific issues which merited particular attention:

- the concept of local taxes and the right of local authorities to determine the rate of these taxes;

- the general trend towards reducing local authorities’ own resources and increasing shared taxes;

- state responsibility for distributing financial transfers and the purposes of financial equalisation;

- central authorities’ increasingly supervisory role with regard to local authority budgets;

- the impact of national financial difficulties on local self-government, particularly in countries having to meet criteria laid down in the Maastricht Treaty;

- public opinion concerning local taxes and the pros and cons of the joint financing of public projects by the state and regional or local authorities.

Prof. DELCAMP based his initial study on the above issues and prepared a second questionnaire, dealing specifically with responsibilities, with a view to drawing up the final report.

The initial report provided the working group with detailed information on several issues: the way local budgets have developed in the various countries, the level of local taxes (exclusively local taxes) in local budgets, the distinction between municipal taxes (which have the same basis of assessment as state taxes but whose rate is determined by the municipalities) and shared taxes (which are levied and whose rate is determined by the state), the concept of adequacy, resources procured through capital raising, local property tax and local corporation tax.

The study showed in particular that local authorities in only 8 European countries could boast a proportion of “own“ resources higher than 50%. It pointed out that money raised through exclusive taxes was constantly falling, often being replaced by transfers. The working group believed that this constituted a restriction on the exercise of local self-government.

After examining the study on local authorities’ responsibilities, based on the 2nd questionnaire and presented by Prof. DELCAMP in early 1998, the working group decided to review the timetable of its work on the final report.

This change of approach was due to the difficulties of drafting a single text dealing with local authorities’ financial resources in relation to their responsibilities. More specifically, the working group had to come to terms with a wide variety of different practices regarding the transfer and delegation of powers to local authorities. Every country has its own established way of doing this, each based on certain principles.

Analysing these different systems in relation to local finances proved an especially complex task since only 15 members of the committee of independent experts replied to the responsibilities questionnaire and because the only statistics currently available to the working group were those contained in tables drawn up by the CDLR for its publications on the functioning of local self-government in the member states.

In the circumstances, the working group thought that it was very difficult to verify the financial resources available to these authorities to enable them to carry out their tasks.

While remaining convinced that linking responsibilities to financial resources in a single report was politically expedient, the group thought that the balance between the two was also dependent on national political and institutional factors which should be studied in greater depth and incorporated in the final report, if it were to be truly complete.

Bearing these difficulties in mind, the working group decided to present the appended preliminary report at the current Plenary Session. The appended document is an interim report because it merely serves to open the debate on the relationship between these resources and responsibilities. The working group will present the final version of the report on local authorities’ financial resources in relation to their responsibilities at the 6th Plenary Session of the Congress in 1999. Hence, the final report will also take into account the discussions held by the CLRAE when this preliminary report is presented.

Therefore, we propose that the draft resolution being submitted for adoption also take these discussions into account.

PRELIMINARY DRAFT CONSOLIDATED REPORT OF THE EXPERTS' CONTRIBUTIONS WITH A VIEW TO THE FOURTH GENERAL REPORT ON THE FINANCIAL RESOURCES OF LOCAL AUTHORITIES IN RELATION TO THEIR RESPONSIBILITIES

Association de Recherche
sur les Collectivités Locales en Europe
(ARCOLE)
Université PARIS I

This third consolidated report of the work of the group of experts forms part of the systematic analysis process which the working group, under the aegis of the CLRAE, decided to undertake as part of its task of monitoring the application of the European Charter of Local Self-Government. The report is concerned with the application of Article 9, which contains the Charter’s provisions regarding finance. It also tries to outline the problems concerning the adequacy of financial resources in relation to the current distribution of responsibilities between local authorities and higher-tier elected authorities. Its authors, therefore, also bore in mind the provisions of Articles 4.3 and 4.4 of the Charter, concerning powers and responsibilities.

This report deals mainly with finances, however, and provides, as far as possible, a comprehensive and helpful overview of the situation in all Council of Europe member states. It considers in turn the place of local budgets and the different ways of funding them and contains a detailed study of the main sources of income (taxes, transfers, fees and charges, capital raising). It also evaluates the real financial autonomy of local authorities in each country concerned by means of previously unpublished tables and graphs.

Rather than wait for a report dealing with both finances and responsibilities - which, given current levels of knowledge of the various national situations, would be virtually impossible to draw up - the working group decided to submit this initial contribution without delay, in order to resume and intensify the discussions already begun with the CDLR and with the Committee of Ministers itself. The aim is to complete, as quickly as possible, a joint assessment of the situation which might help to change governments’ attitudes to a vital issue even if they are currently faced with financial and economic problems.

The working group believes that the principles of financial autonomy should be given particular emphasis because, despite some positive developments (most transfers taking the form of grants which local authorities may freely dispose of), it is apparent that the scope for genuine local taxes, ie taxes for which local councils can at least determine the rate, is narrowing. Of course, autonomy cannot be exercised without accountability. An initial glance shows immediately how unsure people are about what local authorities’ responsibilities actually are. Such uncertainty is doubly harmful: firstly, it makes the relationship between the state and local authorities very unclear, with the result that public scrutiny is impossible; secondly, it makes it impossible even to begin to compare income and expenditure, fundamental though that is to the adequacy principle laid down in the Charter.

In view of these remarks, the Working Group believes that it is all the more necessary to reinforce relations between the Congress and the Committee of Ministers with a common aim to diffuse the principles of local democracy and local self-government as effectively as possible in all European countries and further afield. This implies reinforcing the means at the disposal of the Congress to this effect so that it may carry out its mission - as it would wish - more thoroughly.

I. Step three in monitoring the implementation of the european charter of local self-government: the question of financial autonomy

This report continues on from the work carried out since 1992 by the Council of Europe's Congress of Local and Regional Authorities of Europe. In that year Resolution no. 233 (1991) was enacted, setting up a system for monitoring the implementation of the European Charter of Local Self-Goverment².

The report also continues on from the two first general reports produced at the request of the two previous working groups set up by the CLRAE.

The first of these reports concerned the conditions for incorporating the Charter in the different domestic legal systems³, and the means providing local authorities with the right of recourse to judicial remedy. In so doing, the report concerned itself directly with the implementation of article 11 of the Charter. Since it was also the first experiment of this kind, the report provided the occasion for gathering an initial body of information about the conditions in which the various articles of the Charter were implemented in Council of Europe countries which had signed or ratified the Charter.

The main purpose of the second report concerned the supervision of local and regional authorities, whether by central government or other authorities (regional in a certain number of cases). The articles of the Charter taken into account by the report were articles 3 (the concept of local self-government), 6, paragraph 2, on administrative resources and in particular on the recruitment and management of local authority staff, 7, paragraph 1 (the free exercise of functions) and, of course, article 8, which is entirely devoted to the supervision of local authorities' activities. The scope of the report had therefore been designed with a particularly wide viewpoint.

It also continues on from the report on the Charter’s incorporation in the legal systems of ratifying countries and on legal protection of local self-government. This report in fact covers in greater detail the subject of the first section of the first general report⁴, in the light of the conclusions of the dialogue⁵ with the Committee of Ministers, the first results of which are found in that report.

Encouraged by Resolution no. 34 and Recommendation no. 20 (1996), which were enacted in turn by the Copenhagen Conference marking the tenth anniversary of the signature of the Charter, the third working group of the Congress, during its sessions of 7 and 8 November in Strasbourg, chaired by Mr. Gehrard ENGEL, decided to pursue the work that had been undertaken. This time the group was to tackle a subject of particular importance for the self-government of local authorities, that of finances. In so doing, the group was more than simply continuing the patient work of analysis, article by article, that it had been given by the Congress as its objective. It thus allayed the misgivings that had been expressed during the development of the supervisory system about its extension to cover financial matters, which were likely to "concern delicate questions of political subjectivity"⁶, an extension in scope which admittedly also posed certain problems of interpretation, particularly with regard to the "entitlement of local authorities" to "adequate financial resources of their own" stipulated in paragraph 9-1.

The group was perfectly aware of this difficulty, since it considered it impossible to examine the question of finances without at the same time examining that of powers and responsibilities. As a result, the scope of the study was to include not only the whole of article 9, but also paragraphs 4 and 5 of article 4, devoted to such competencies.

For methodological reasons and in view of the difficulty of preparing a comprehensive first report that used the same basic approach for all Council of Europe member states, the working group followed the experts’ suggestion of dividing the work into two phases: an initial technical report on financial resources, to be followed by a second report on responsibilities. This distinction seemed particularly appropriate since the Committee of Ministers had commissioned a study of local finances in Europe for the Lisbon Conference⁷.

Firstly, therefore, a questionnaire on the implementation of Article 9 of the Charter was drawn up and sent to the members of the committee of experts, who were able to refine and elaborate on their replies at the joint meeting with the working group, held on 22 and 23 May 1997. An initial draft consolidated report, showing the difficulty of establishing comparable figures, was also presented at that meeting. Hence, a supplementary questionnaire was sent out, with the result that a virtually definitive version was presented at the meeting on 13 October. Despite the quality of the information provided, the rapporteur was obliged to use even more statistics emanating from outside the working group than had originally been anticipated. Details of these statistics are provided in the section of the report devoted to methodology.

In spite of the inevitable imperfections of such a project⁸, the work carried out represents a major achievement since it is concerned with a very difficult subject. The level of accuracy provided with a view to drawing an effective comparison between different national situations was sufficiently high to enable the working group to make a “political” assessment of the situation of local authority finances from the local self-government viewpoint.

National contributions were made by independent experts from the following countries:

Belgium, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Italy, Latvia, Lithuania, Luxembourg, Former Yugoslav Republic of Macedonia, Malta, Netherlands, Norway, Portugal, Russia, Slovenia, Spain, Sweden, Turkey and United Kingdom. The Danish and Portuguese experts also replied to the supplementary questionnaire.

This report also takes into account the observations made at the meeting on 13 October 1997.

The preliminary conclusions drawn from the experts’ replies to the second questionnaire, covering responsibilities, were also presented at the meeting on 13 October.

- firstly, problems of definition. The Charter itself referred to several concepts which were hard to define clearly: own responsibilities, delegated responsibilities, full and exclusive powers, a substantial share of public affairs. One of the initial conclusions was the fact that these concepts firstly had to be clarified, possibly in a resolution interpretating them, as was recently the case with regard to Article 7.1 on the free exercise of functions.

- considerable differences of opinion with regard to the distinction between “general responsibilities” and “attributed responsibilities”, and to whether it was appropriate to list all such responsibilities in the law.

- insufficiently detailed replies on the range of responsibilities covered and, more important, a failure to provide the quantitative information necessary, a priori, to assess the “adequacy” of resources in relation to responsibilities.

It was therefore decided to delay presenting the final report until 19 and 20 January 1998.

A wide-ranging and very interesting exchange of views on the subject of responsibilities was held at this working group meeting. The rapporteur for the group of experts opened the debate, with the assistance on this occasion of Mr Philippe DE BRUYCKER, director of the Centre of Public Law at the Université Libre de Bruxelles, Belgian member of the Committee of Independent Experts and Secretary General of ARCOLE. The discussion touched in particular on whether it was actually possible to make an “objective” comparison of the resources available to local authorities and the funds they “theoretically” needed to carry out their tasks. As well as the difficulty of making such an assessment, there was the question of whether responsibilities were obligatory or not, the difficulty (and sometimes the appropriateness) of defining service “standards” and the uncertainty which might surround a precise a priori definition of local authorities’ “own” tax resources. A less ambitious approach was proposed: to find out in particular whether the different Council of Europe member states actually recognised the notion of “equivalence” between resources and responsibilities and if they applied it in practice, for example when state (or regional) responsibilities were transferred to local authorities.

As far as genuinely exercised responsibilities were concerned, it also seemed that, if the work was to be done properly, preliminary fact-finding, standardising analysis tools, deciphering the legislation of the various countries and evaluating the budget required for each individual task would be at least as complicated as the work on financial resources had been (there were perhaps even fewer comparable sources). Certainly, the task needed simplifying. In view of the replies submitted by the experts, which were fewer in number and less detailed⁹ than those concerning financial resources, it was in any case impossible to bring this work to a satisfactory conclusion immediately. The following 12 countries replied first to the questionnaire: Denmark, Finland, France, Germany, Hungary, Italy, Latvia, Lithuania, Portugal, Spain, Sweden and Turkey. They were followed by Bosnia and Herzegovina, Iceland, Russia and the United Kingdom (Great Britain).

It was therefore decided that only the part on financial resources would be submitted to the Congress for approval at its first session, mainly so that dialogue with the Committee of Ministers could begin as soon as possible. This dialogue could be made more thorough and might include, for example, informal contacts between either the experts or the working group and a CDLR delegation. This could lead to agreement on the way the financial situation of local self-government should be analysed and on the measures that governments might be led to take as a result of such analysis. The problem of evaluating responsibilities could also be outlined, with emphasis on the notion of equivalence between resources and responsibilities. Hence, an active process could be established, based on greater awareness of how local democracy in Europe really functioned. The rapporteur for the group of independent experts, meanwhile, stressed that the difficulties already met were an inevitable result of the more thorough and objective approach which the various Congress working groups had been forced to adopt since the process of monitoring the Charter’s implementation had been pragmatically and gradually set in motion. Moreover, it was precisely because of this approach that the Committee of Ministers had taken the working groups’ views into consideration.

In keeping with the outcome of the 2nd Conference, held in Barcelona in April 1997, the future resolution would also provide an opportunity to persuade the Congress to consider new methods which might prove necessary to setting up permanent monitoring of the Charter’s implementation.

The work carried out has shown the seriousness of methodological problems and has confirmed the need to provide an updated analysis of the Charter’s provisions, in particular so that they can be understood and implemented in all countries, whether or not they already have an established system of local democracy.

II. METHODOLOGICAL PROBLEMS RAISED BY A COMPARATIVE STUDY OF LOCAL FINANCIAL RESOURCES:

The first issue that needs to be addressed is clearly the sources of information on local finance.

The most homogeneous system is that of the European Community (EUROSTAT); it is inconvenient, however, in that it only applies to the 15 member States, and places very little importance on local authorities, which are considered from the economic rather than the legal or democratic points of view¹⁰.

Similar observations may be made about the two other systematic sources available: the statistics of the Organisation for Economic Co-operation and Development (OECD), the scope of which, however, for the time being at least, does not include all the Council of Europe's member States, and the statistics produced by the International Monetary Fund (IMF)¹¹.

A fourth, more adequate source of statistics has been added this year, produced within the Council of Europe itself, further to the initiative of the Committee of Ministers as part of the preparations for the 11th session of the Conference of European ministers in charge of local authorities, which took place in Lisbon on 10 and 11 October 1996. The introductory reports were published at the beginning of this year as part of the "Local and Regional Authorities in Europe" series. Of particular note is the CDLR report prepared with the assistance of professors David KING and Rémi JEQUIER who, based on OECD accounts and the replies provided by the different delegations to the CDLR, have developed a series of tables covering most member States of the Council of Europe.

It is also worth noting that, further to the initiative by DEXIA, a new banking group specialised in financial engineering for local authorities, a systematic survey has also been carried out on "local financial resources in the fifteen countries of the European Union"¹². A feature specific to this survey is that it was based on national accounts and on direct contact with qualified experts in the various countries under consideration. The method adopted was therefore similar to that used by the group of experts appointed to assist the working group of the Congress. In addition, a noteworthy fact is that the unit adopted by the group was the decentralised regional authority, and the authors of the survey took considerable lengths to determine a factor basic to our own study, namely the "margin for manoeuvre in local taxation", defined as the "real ability of local authorities to change their own level of tax revenue by modifying rates and/or the bases of assessment". A distinction is not always made, however, between the first and second "decentralised" levels, such as the regional and local authorities in Italy.

Surprising though it may seem in 1997, therefore, the result is that it is impossible to refer to a single, unanimously accepted source of statistics valid for all countries in the survey. It is therefore tempting to try to set up such a source, but on the other hand one can easily see that what has been impossible up until now falls well outside not only the scope but also the purpose of this simple report.

Furthermore, despite their quality and the effort made at standardisation, the contributions of the experts, being based on national statistics, are not wholly comparable, if only because of the difficulty in obtaining definitive figures for a relatively recent given year. 1995 seemed an acceptable target, but the fact of the matter is that the data for that year are not yet available for every country.

It therefore seemed preferable to adopt a pragmatic approach, situated halfway between the ideal situation, i.e. setting up a simple, harmonised reference system, and an incomplete overview of unevenly detailed monographs. Our concern has been to create a working document which excludes none of the overall sources available, but which is sufficiently close to the "field" to complete or correct general data with information sourced in each country. The working document is also intended to satisfy the overall purpose of the survey, namely to provide enough "objective" information for the members of the Congress of Local and Regional Authorities of Europe to assess the way in which article 9 of the Charter has been implemented in the countries that have signed or ratified that fundamental document, and even to form an opinion as near to reality as possible of the financial situation of the different local authorities in Europe.

It is a matter of course that during the exercise we have been led to give priority to the work carried out by the CDLR in relation to all the sources of information. This seemed logical in that its approach, although in a different context, has the same ultimate purpose and is based on similar methods (gathering information from national experts in order to draft a "policy" document, as an eventual source of resolutions and recommendations for member States). In addition, the recent experiment in interchange between the CLRAE and the CDLR also seemed to indicate that particular emphasis, despite the fact that up to the present date the Congress has been more prone to carrying out research and sending recommendations to the CDLR in order to obtain its reactions¹³. A third, practical reason also led us in the same direction: rather than attempt to continually repeat the same imperfect surveys "by starting from scratch", might it not be preferable to use existing studies and develop them, if necessary criticising and improving them in order to get closer to reality? For this reason, reference is made in the present report to the data gathered as part of the CDLR study on local financial resources in Europe, and will at least be considered as a starting point.

Finally, before discussing the real subject of this report, it should be stated that precisely because of the specific difficulty in gathering data on financial matters, and the lead times available for doing so¹⁴, it seemed preferable to the working group to separate the study of finances from that of competencies. The preliminary work of the group of experts, therefore, will result in practise in the drafting of two reports, one devoted to finances - the present document - and the other devoted to powers and responsibilities, given that even an approximate understanding of the latter is vital in order to assess the concept of "adequacy". For this reason, from the month of June onwards, at the same time that additional information on finances was requested from the experts, a second questionnaire was sent them, exclusively focusing on competencies. In addition to contributions from the above-mentioned experts, contributions from two ARCOLE members (Belgium and Germany) as well as various personal documents were used. Care was also taken to refer whenever necessary to the monographs published by the CDLR. This covered part of the groundwork for the monitoring files on each country that the working group had decided to set up.

As far as possible, given the variety of sources available, we have strived to provide indications on all the countries that have signed or ratified the Charter (and even others when a monograph was available that had been established by the CDLR¹⁵).

III. THE PROVISIONS OF THE EUROPEAN CHARTER OF LOCAL SELF-GOVERNMENT RELATED TO FINANCES

The reference provisions are contained in article 9, but it is obvious they cannot be taken into consideration independently of the other provisions, in particular those aimed at instituting the legislative and even constitutional warranties of self-government (articles 2 and 3 in particular). They should also be viewed in relation to the provisions concerning responsibilities. Indeed, this is expressly stated in Article 9.2 itself: “Local authorities’ financial resources shall be commensurate with the responsibilities provided for by the constitution and the law.”

3.1. The importance of "own resources": the principle of effective accountability:

3.1.1 Paragraph 1 of article 9 first of all states that local authorities shall be entitled to resources of their own.

This concept of "resources of their own" is explained immediately afterwards, as being resources that local authorities may "freely dispose of ". Indeed, it is essential that they have full discretion in choosing how resources are earmarked within their own sphere of responsibility.

Transfers received from the State or from other public or private bodies, therefore, cannot be considered by local authorities as resources of their own.

Resources that fall within this definition are first of all fees, i.e. revenue proceeding from paying services performed to benefit the local population (the supply of drinking water, if this is provided by the local authority etc.) or taxes that may be related to authorisations (building permits, authorisations to use public property such as a marketplace etc.), or to local development (the building of approach roads for use by companies etc.)

This first type of resources forms part of an economic and social context in which it is accepted that users are held to pay a price in return for services provided by the local authority, and that the price must not be too far removed from the real cost of the service rendered.

To these fees naturally may be added the revenue from property belonging to the local authority, given the latter is entitled to dispose of same. We should therefore note in passing the importance, above all in recent democracies, of a clear definition of the assets of the various public authorities, whether the latter are governed by the rules of private law or not. Resources of this nature come from rental income on private property owned by the local authority, or, more exceptionally, from the sale of assets.

In fact, as a general rule, local authorities do not have any commercial activity, and their management cannot be compared to that of a company.

3.1.2 The second item under the heading of local resources is that of taxes.

Taxes, in fact, are normally the greatest source of income, since they represent one feature of the local authority's independence but also symbolise the autonomy held by its representative bodies by virtue of their election by the local population. The ability to levy taxes is indeed a basic prerogative which separates a public authority from private individuals. Whatever their level, only democratically elected assemblies have the right to vote taxes.

The power to vote taxes is also essential as a means for declaring and developing the accountability of such assemblies. Voting taxes is therefore at the same time the most symbolic and the most difficult exercise to perform in relation to citizens.

Reciprocally, the latter are all the more inclined to accept a tax if in concrete terms they can see "where their taxes go" at the local level, and can compare them with the quantity of service they receive in return. For this reason Charter article 9-3 provides that part at least of their own resources "shall derive from local taxes and charges of which, within the limits of statute, [the local authorities] shall have the power to determine the rate.".

The term local taxes, according to the terms of the Charter, is intended to refer to taxes distinct if possible from national or regional taxes (or federal taxes in the case of a federation). In fact, it is essential that citizens can see to what uses their money is put, and clearly understand for which local authority it is destined.

The fact that local authorities can call on tax resources of their own is at the same time an element of security for local administrators, who thus are able to ascertain what type of resources they can depend upon in the long term.

Having their own taxes is not enough, however; local authorities must also be able to vary their amount. "It is accepted that central or regional statutes may set overall limits to local authorities' powers of taxation; however, they must not prevent the effective functioning of the process of local accountability"¹⁶.

In very general terms, local authorities raise property taxes, the basis of assessment for which relates to the ownership (of land or houses) or the occupation of housing.

These easily localised taxes are generally allocated to the nearest local authority, but they are inadequate, and relatively unresponsive. Yet the Charter provides that local resources "shall be of a sufficiently buoyant nature for them to keep pace, as far as practically possible, with the real evolution of the cost of carrying out their tasks".

Hence the need to undertake reforms to complete property taxes by more dynamic taxes, such as taxes on income, on business activity etc. The Charter makes no statement about the nature of these taxes and leaves the choice open to the countries concerned.

Determining what property is subject to taxation is a natural cause of tension between local authorities and central government, each attempting to obtain the greatest portion of the most dynamic form of taxation. The problem, of course, becomes even more complex when a regional level is added to the central and local levels.

These difficulties, and a good many others that will appear depending on the way in which national situations are analysed, make it all the more urgent to reiterate this requirement of the Charter.

At this point, however, it is worthwhile introducing a further distinction in order to more fully comprehend the concept of local taxes, as defined by the Charter.

With regard to the basis of assessment, i.e. the definition of the various items that constitute property subject to taxation, it is not necessary - even though it may be desirable - for the basis to be defined at the local level. All that is required - and here we concur with the legal part of the Charter - is for the basis of assessment to be defined at a sufficient level, generally that of the national parliament. If genuinely exclusive taxes cannot be levied, national and local levels may make use of the same basis of assessment. In this case, failing the ability to affect the basis of assessment, the local authority must be assured it can modify the rate of taxation.

Indeed, there can be no freedom at all if local authorities have no freedom to exercise discretion in terms of tax rates. At the very most, for national economic reasons, or to ensure a certain degree of comparability of the tax burden, pegging or ceilings may be admissible, but only by law. The explanatory report is very clear in this respect¹⁷. Resources proceeding from the sharing of national taxes, therefore, based on a priori keys of redistribution, may in no way normally be considered as resources of their own. On this point, we concur with the experts of the CDLR.

Sufficiency of resources is to be appraised in relation to the competencies entrusted to the local authority, referred to in the explanatory report as a relationship of "adequacy". Charter article 9-2 thus provides that "local authorities' financial resources shall be commensurate with the responsibilities provided for by the constitution and the law". For this reason, it is extremely difficult to assess the financial independence of local or regional authorities without examining in parallel the competencies entrusted to them. This only further increases the difficulties of comparison already indicated, since their powers and responsibilities themselves are usually far from being clearly defined.

Even though adequacy may be difficult to appraise, the concept is a powerful incentive to set up, either legally or constitutionally, a means of clearly defining competencies for each level.

The consequences drawn by the Charter from the sufficiency principle are twofold:

· The first is that of the necessary balance between the transfer of competencies from central or regional government and the corresponding financial transfers.

· The second is that the tax system, which is generally insufficient to meet needs, has to be completed by transfers.

These refer to a general concept designating all the movements of budgetary resources from the central State to local authorities. The concept therefore needs further explanation.

The oldest and most traditional form of transfer is that of grants. Using these, the State helps the local authority to carry out a project which requires funds beyond the scope of its budgetary resources (such as large-scale capital investments). In actual fact, from the State's viewpoint, a grant frequently represents a means of supervising the way in which local authorities carry out their responsibilities. Grants are often accompanied by technical requirements (which may be real or presented as such, and are imposed on the local authority) with the result that, rather than an aid, they often form an incentive to commit the financial resources of the local authority to the realisation of some project, or of some form of action that complies with government policy.

A second factor in the development of these transfers stems from the need to ensure a certain degree of financial equalisation of resources to protect, according to the Charter, "financially weaker local authorities" (9-5).

Experience has also shown that, more and more frequently, the development in transfers stems from the difficulty in finding new tax resources which are sufficiently well distributed to be transferred. Equally often, these new transfers have compensated for the withdrawal of taxes which over time have become inappropriate (for instance the problems that arose in the United Kingdom when attempting to replace the traditional property tax) or which have become incompatible with developments in national taxation (such as the introduction of Value Added Tax, which rendered a certain number of former local taxes on consumption null and void).

Whatever the causes for their introduction, the methods of allocating and distributing transfers must also comply with a certain number of principles:

· They must not be such that they diminish the discretion local authorities may exercise¹⁸. As far as possible, therefore, block grants are to be preferred, i.e. which are not earmarked for specific projects.

· Nor must the share of transfers allocated to equalisation be such that it removes that same basic freedom. Hence the requirement for firm, clearly defined criteria, preferably established through consultation ((9-6) with local authorities or their representatives.

With respect to the origin and the amount of the transfers, the solutions can be diverse: they may be financial transfers from State budgets or other public bodies; they may also be shared taxes, i.e. taxes levied at the national level (or, more exceptionally, at another level), income from which is distributed between several levels of public authorities according to the above-mentioned criteria. The "dynamic" nature of the resources mentioned in the Charter, of course, equally applies to transfers. This is why the question of their indexing, or failing such, that of the annual re-negotiation of their amount must be posed when they are established.

Another question that must be posed is the standard level or type of procedure permitting the establishment of keys for the distribution of transfers. This is one of the main issues, given the importance acquired by transfers in financial relations between governments and local authorities today. The important point, of course, is that these procedures should be based on consultation with the local authorities concerned (9-6). But the overriding factor is that it must be impossible to modify the distribution keys in any unilateral or covert way. They form an integral part of the essential elements in local self-government, and as such, have the benefit of the guarantees provided for in article 2, namely recognition in "domestic legislation" (by which is meant acts passed by parliament), or "where practicable" in the constitution. Concrete experience has shown that the latter requirement, where distribution keys are concerned, is not as unrealistic as one might imagine¹⁹.

The last type of financial resources provided for by the Charter concerns those resources obtained through capital raising. Paragraph 9-8 provides for this in order to finance capital investment (which seems to imply that the funding of current expenditure by capital raising is financially unorthodox). In order to do so, local authorities must have access to the "national capital market" within the limits of the law.

In its own right, Article 9 forms an integral chapter of the European Charter of local self-government. It needs to be confronted with certain realities which, in some respects, have considerably changed since the Charter was drafted, notably as a result of the internationalisation of the capital markets, itself a furtherance of liberalisation - and even the privatisation of public activities - and of the pressures exerted by the potential recession that has weighed on the various public budgets in recent years.

Although the scale of local budgets is not a criterion of self-government explicitly specified by the Charter, it is nonetheless one of the indicators of the degree of decentralisation of a State. In addition, it seemed useful to provide an overview of the situation in the introduction to this report. It will not be possible, however, to draw any significant lessons from the tables presented below, since their interpretation necessarily requires knowledge of the powers and responsibilities involved, which are the subject of the second report. On the other hand, the following chapters may clarify conclusions drawn about scale, the first criterion.

This chapter also places greater emphasis on the issue of statistical sources. Since the experts' contributions were insufficiently homogeneous in macro-economic terms, and did not cover all the countries having signed or ratified the Charter, they could only be used to adjust or to commentate complete series of existing statistics.

We came up against several difficulties in doing so, the first of these being the uncertainty of the categories of statistics adopted and the absence of any homogeneity in definitions. This is particularly true of the IMF statistics, which make no clear distinction between expenditure for, and revenue from, the various social welfare systems. In addition, a distinction is not always made between local and regional budgets. This is the case, for instance, with the most recent comparative statistics (1985/1994), in which the distinction is made for only 5 out of the 39 member States of the Council of Europe: Germany, Austria, Spain, Switzerland (but neither Italy nor Belgium), none of which falls within homogeneous categories. On the other hand, the distinction is applied to the Netherlands, the only unitary country in the sample. The IMF statistics, however, can be used to gain a relatively accurate overview of the change over ten years in the place of local budgets in relation to the budgets of central governments.

It therefore seemed preferable to use an initial table established by King and Jéquier²⁰, and to commentate it, notably in the light of the experts' contributions. It compares municipal expenditure on the one hand with the Gross Domestic Product (GDP), and with General Government Expenditure (GGE) on the other. For the purposes of our study, it seemed useful to examine the two sets of figures separately, and to present the results in the form of two graphs in which the various countries are ranked in ascending order, to make the results easier to read and as groundwork for the comparison of this expenditure with the local authorities’ competencies.

Table 1 Local budgets in relation to Gross Domestic Product (GDP) and to General Government Expenditure (GGE)²¹.

According to the data in the first K&J table above, local authority expenditure in the different Council of Europe countries, compared with the Gross Domestic Product for each of the countries concerned, ranged from 0.11% (San Marino) to 27.5% (Sweden), with an average of 8.91%. The spread between the countries having signed and ratified the Charter is only slightly lower (the lowest rate, that of Malta, is hardly any higher than that for San Marino (0.337%). The size of the states should be taken into consideration, however, as well as the different spans of time in which the conditions for local self-government have been applied.

In this respect, it is particularly noteworthy that the countries in central and eastern Europe have made considerable efforts in very little time. The country with the lowest ratio of local authority expenditure to Gross Domestic Product is Romania, with 3.5%, a figure comparable to that for Greece, although the latter is a member of the European Union. The highest percentage is that for Hungary (17%), apart from the ratios for the Nordic countries, which have the largest local budgets from the point of view of this criterion.

As supplementary information, we have included the figures provided by the experts, or lacking any such data, and if the country in question is a member of the European Union, the figures contained in the DEXIA study mentioned earlier. Certain differences may be attributed to the year of reference (France, for instance, to a large degree), but in most cases they are the result of an ambiguity in the scope of the term "local" budgets. Most DEXIA statistics seem to cover not only local authority expenditure but also that incurred at other levels of local authority, when they exist (such as provinces, counties or départements). In the case of Austria, the inclusion of the city-state of Vienna results in a slight over-estimation in the weight of local authorities²⁴ (a fact also applicable to Oslo, although to a lesser degree). There remains one anomaly specific to the Nordic countries: the differences can be considerable depending on whether social welfare expenditure is included or not, the latter usually being borne by the county but fully reimbursed by the State. The non-inclusion of such expenditure for Denmark results in a minimisation of the weight of the local authority sector in the country. If the statistics had not been expressed in that fashion, Denmark would easily find itself at the top of the list for the weight of local authority expenditure in relation to Gross Domestic Product. A certain number of other variations persist which are difficult to explain and stem from methodological problems. These differences could have been eliminated from the tables, but it seemed useful to include them, if only to show the degree to which these types of statistics should be taken with caution. Rather than attempt to correct the K&J table in the margin, it seemed preferable to keep it as a basis for the graph presented on the following page. The differences noted might give rise to further research or help to find variables that explain the differences between the various countries.

The report established by the CDLR refers to the place of municipal expenditure (with, as we have seen, the reserves that must be applied to the scope of that term) in relation to general "Government expenditure". Although the concept is precise, it seems ambiguous in that it appears to give the word "government" a particularly wide meaning, including local and regional authorities. The conclusions that can be drawn from such comparisons, of course, are not void of interest in that they permit, in particular, the figures in relation to GDP to be corrected, by "neutralising", so to speak, the impact of the different levels of interventionism of the public structures in the country in question. The ideal situation would have been to compare the weight of the local sector with the State budget, a comparison made possible using the IMF statistics, within the limits already indicated. Indeed, an inattentive reader might suppose that this is precisely what the figures do. In actual fact, the values taken into account are those for all public authority budgets (central government, regional authority or government when such exists, local authorities and in all likelihood - unfortunately we may say, because of the uncertainty of the scope of the terms - budgets which do not come under the heading of local authorities in the strict sense of the term, namely, from the point of view of the Charter, those administered by elected representatives). It seemed preferable to make this apparent by referring to "public budgets" in general, while remaining perfectly conscious of the unsatisfactory nature of the term²⁵. The scale of local budgets in relation to overall public budgets bracket an average of 22%, or one-fifth, with minima for San Marino, Malta and the former Yugoslav Republic of Macedonia (of around 1%), and maxima of up to 60% (Norway).

The case of San Marino, Malta, and to a lesser degree, Cyprus, can be fairly easily explained by the characteristics of the territories in question. It seems impossible to use the figures for Greece, which are too out of date.

At the other extreme, we have four countries with highly differing characteristics: Norway and Sweden, to which should be added Denmark, which is close for the statistical reasons explained above, but also Hungary and Lithuania. The rank of Lithuania is confirmed by the report of the expert for the country, even if the figures seem slightly lower. They reflect a regular downturn (from 43.9% in 1991 to 35.6% in 1996).

If the maximum and minimum figures are excluded, most of the countries lie in a bracket ranging from 10 to 30%; the rates for 7 of these (the United Kingdom, France, Switzerland, Germany, Finland, Denmark and Luxembourg) range between 27 and 30%, which would seem to suggest local budgets represent nearly half the budget of the central government (and are equal to it in Germany, due to the overall weight of the budgets of the Länder).

Over and above spatial comparisons that must be considered with caution, as we have seen, because of the difficulty in gathering data which are fully analogous, it is tempting to measure trends over time and to ascertain their direction, in meaningful although no doubt general terms. It is an irrefutable means of ensuring that the various legislative reforms and declarations of intent in favour of local self-government are having an effect.

Here once again, the statistics are inadequate, since they are not available for every country, and are not always homogeneous. A single source of data is therefore insufficient. We have carried out a study based on IMF statistics which provide - at least in theory - figures for each of the countries in question. The graph below shows the trends from 1985 to 1994 for all the countries in the field for which figures were available. Out of the 23 countries, the trend can be seen to be relatively dissimilar, since apart from situations of relative stability (such as in Denmark, but also at high levels in Belgium, the Netherlands and Germany) the 19 remaining countries are more or less equally divided between those in which the relative proportion of local budgets increased, and those in which the proportion decreased.

Development of local budgets in relation to central government budgets (1985-1994)
Source: IMF

A considerable number of the drops in percentage share concerns the new democracies of central and eastern Europe. Some of the falls are occasionally spectacular (to nearly half in Estonia, a little less for Poland). These figures must be interpreted with caution. The first reason, given the reference date (1985) is that of terms. It is common knowledge that "decentralisation" in the former people’s democracies was artificial to a very large degree, corrected as it was by the doctrine of "democratic centralism". Most of the services concerning the population were no doubt connected to the local level but they were not accountable to independent authorities appointed after free elections. This can result in a paradox, in that citizens may have the initial impression that decentralisation is less extensive under the new system, since self-governing local authorities provide less services than the purportedly independent authorities did so beforehand. Accounts of this kind exist²⁶. The reports by the Lithuanian and Latvian experts confirm this, since instead of increasing, the portion of local budgets has steadily decreased in both countries (from 26% in 1994 to 19% in 1997 for Latvia²⁷; from 43.9% to 35.1% between 1991 and 1996 for Lithuania²⁸). Taking into account the high starting point, it would nonetheless seem that the portion of local budgets tends to decrease as new institutions are set up. This takes place in two phases: the first corresponds to the gradual definition of the respective spheres of the central government and local and regional authorities that previously had coincided; in the second phase, just as the oldest democratic States, the new democracies find themselves confronted with the familiar friction between the central powers and local authorities, particularly in times of financial duress. Local authorities, being less well entrenched, find it more difficult to resist. It should equally be pointed out that decentralisation also coincides with a phase of privatisation, the effect of which is to reduce the influence of public authorities, particularly at the local level. Greater recourse to private enterprise of this kind may no doubt partially explain the similar trends to be seen, surprisingly enough, in countries in which decentralisation, far from decreasing, on the contrary has expanded (Finland).

To limit ourselves to this first group of new democracies, however, we can therefore conclude that the relative decrease in the weight of local expenditure over ten years is not in itself indicative of a regression in decentralisation. One might almost be tempted to put forward the opposite hypothesis, since in a certain number of those countries in which the fall is least marked, at first sight the reforms would seem to be taking place at the slowest pace and with the greatest uncertainty, at least where local democracy is concerned (such as in Bulgaria and Russia). Speculations such as these should not hide certain more positive trends, however, which are the consequences of the reforms that have been undertaken in this same area (such as in the Czech Republic).

Even if these findings should be considered with caution, they suggest that when examining decentralisation reforms in the former peoples' democracies, special considerations should be applied.

The countries of Central and Eastern Europe are not the only ones to form the sample of states in which the portion of local budgets tended to drop between 1985 and 1994. On the contrary, some extremely old democracies, often cited as examples for their decentralised organisation, also belong to the same group. Such cases in particular include Sweden, Switzerland and the United Kingdom. The situation in the latter country is henceforth well known, and the finding only corroborates previous analyses; with regard to Switzerland - a country outside the survey - the fact seems more surprising, however. Perhaps we should seek an answer in the development of federalism and the relative weight of cantons in relation to municipalities (?). The considerable effort made by Sweden to reduce public expenditure in general only partially explains the relative decrease shown here.

Positive trends can be seen in countries that for many years have been members of the Council of Europe and which are known to have to have undertaken an effort to catch up in the move towards decentralisation. Among these figure countries in southern Europe (Spain, Portugal and Italy - to a lesser degree²⁹) as well as France, Iceland and Luxembourg. Earlier studies on the period 1980-1987 had shown more even more significant trends. In 6 states (Germany, Belgium, Spain, France, the United Kingdom and Italy) the portion of local authority expenditure on average rose from 9.3 to 10.2% of GDP. Within this sample, however, the falls (in Belgium, the United Kingdom and Germany respectively) were compensated by the growth in the three other countries (in ascending order Spain, with Italy and France virtually equal). Since that date, the municipalities in Spain, as the municipalities in Belgium before them, seem to have suffered from the increasing preponderance of regional authorities (local expenditure had a 12.7% share in 1986, but 11.3% in 1995). In Portugal, on the other hand, a unitary country, the portion rose from 10% in 1990 to 12% in 1996.

One cannot be satisfied with using an approach as general as this to evaluate the way in which the different countries are applying the provisions of the Charter. These assessments must be moderated by a precise analysis of the means, and above all the freedom of discretion exercised by local authorities to vary such means in relation to their own policy options. As the examination of the former peoples’ democracies has shown, there is no point in theoretically having a large local sector, and leaving the allocation of most of its resources to the discretion of central government. In this context, the degree of control over their local taxes held by local authorities seems to be a criterion at least as important as the overall weight of their budgets.

V THE ORIGIN OF THE DIFFERENT RESOURCES IN LOCAL BUDGETS AND THE ROLE OF LOCAL TAXES

5.1 Definitions: The concept of local taxes - the distinction between taxation and transfers:

A theoretical maximalist definition of the concept of "local taxes"³⁰ would require us to consider only a taxation system in which each tax would be created, all its factors defined (taxable value and basis of assessment) and its rate varied according to the free will of the elected representatives of the community, and collected by that community’s officers. The tax chain would thus be complete.

Even if this situation may occasionally exist in reality (most of time for taxes with little impact), it gives little consideration for the fact that a local authority cannot be assimilated to an independent state but is part of a system governed by general laws, and in terms of taxes, in particular must take into account the fact that it involves exactly the same economic actors, whether the latter pay their taxes to the central government, or to the regional or local authorities direct. Where taxes are concerned, as in other areas, the concept of self-government must be understood to be exercised, to quote the Charter, "within the limits of statute" (9-3). Paragraph 9-1 is even more precise since it provides that the right to "adequate financial resources" is limited by " national economic policy".

This principal being stated, each State having signed the Charter undertakes to ensure local authorities have resources of "their own" in order to exercise, as freely as practically possible, the powers and responsibilities entrusted to them by the constitution or the law.

Having resources of their own therefore means resources which are clearly allocated in advance - of which the community can only be deprived through a particularly serious procedure - that the community may freely dispose of, and, with respect to taxes, that it can vary of its own accord in relation to its requirements, taking into account the degree to which the citizens that form the selfsame community accept the tax burden.

The ability to vary the amount of taxes collected is essential, and is precisely the most important factor distinguishing them from the other main source of revenue, namely transfers, whose amount by definition is determined by a power other than the local authority, even though the latter may be associated with the determination of that amount, in some way or another. Indeed, it has been argued that elected representatives should have the discretion of this ability at least in order to fulfil their responsibilities in relation to their fellow citizens. If such a link were lacking, the very concept of a local authority, as a place for learning and practising democracy, would be in danger.

Local administrators, therefore, are not merely elected to "manage" local affairs, they are also appointed as "representatives" of their fellow citizens and as such, therefore, must take genuine decisions in their name. This function would be threatened if they had no more to do than to redistribute resources coming from, and determined by, an outside authority.

The only tax, therefore, that may be considered as falling within the scope of this definition of loca taxes, is one, whether allocated to the community or created by it, whose amount may be freely varied by its elected representatives.

Realism leads us to make a certain number of distinctions within the category of "local taxes" defined in this way. An initial distinction may be made between "exclusive" taxes and the others.

Exclusive taxes are those which come closest to the ideal definition. Included within them are those taxes allocated by the local authority to the category to which it belongs, namely, taxes that that only the local authority can raise. It is through these taxes that the independence of the authority is most likely to be clearly expressed. As we shall see, in most countries today, apart from one or two exceptions, exclusive taxes are neither the greatest in number, nor do they produce the greatest yield. It is common knowledge that governments have always tended to take over taxes with the highest yield (such as income tax or corporation tax).

The difficulty in finding sufficiently diverse forms of property subject to taxation and which are sufficiently well distributed throughout the territory (an extremely important factor for local taxes) has led most states to set up taxation systems in which the basis of assessment for the tax is common to the State and to the local authority (the most representative example in this respect being income tax in the Nordic countries). In our opinion, this does not prevent this type of tax from being included under the heading of local taxes³¹. The fact that the basis of assessment should be common to that adopted by the State may be to some advantage, not only in relation to the cost of collection but also in ensuring a certain degree of equality in terms of taxation throughout the national territory.

In our opinion, on the other hand, it does not seem possible to include in local taxes what is commonly referred to in the United Kingdom as "shared taxes", i.e. taxes collected at the national level before being redistributed to several levels of authorities.

These resources are much closer to a budget allocation than a tax. For this reason, it seems more logical to include them under the heading of transfers. We also noted with interest that the same option was taken by the CDLR in its report mentioned earlier. After citing the two most representative cases, that of Germany and of Austria, the authors of the report emphasise the fact that the shared tax system has two drawbacks: "local authorities cannot determine their own tax rates; the central government may see the shared tax revenues as part of its own revenues which it is giving away, and in this case it may want as many controls as it would want with grants"³².

To make a clearer distinction between transfer-taxes and non-exclusive local taxes, we propose to refer to the latter as "common taxes"³³. It would worthwhile finding a term in English to clearly define this concept of taxes in which the basis of assessment is common to the state and to local authorities, since the expression "shared taxes" can equally as well designate "common taxes", which, from the strict viewpoint of local self-government is not the same thing at all. Common taxes also often have higher yields (income tax, for instance). In some countries, essentially France, "exclusive" local taxes are common to several levels of local authorities.

On the other hand, in our opinion, the fact that a tax may be mandatory or non-mandatory has no impact on its nature as a local resource or not.

5.2 The proportion of the different categories of resources in the local budgets of Council of Europe member States and the place of local taxes:

Based on these definitions, and with priority being given to the information provided by the members of the group of experts, we have drawn up the table below.

Table no. 2 gives both a general and fairly accurate idea of the proportion in each country of the different categories of resources providing income for local budgets. The figures used are those found in the CDLR report, modified on the basis of the data supplied by the experts, which were also much more numerous and usable than for the previous table³⁴.

It may be observed that the orders of magnitude are on average considerably different³⁶. We attached particular importance to further analysis of the "Other" item³⁷, which is generally considered a "hold-all" heading and often attains proportions which make comparisons difficult. One of the headings in which the differences are greatest is that of local taxes. The fact that the table drawn up by the experts, who are a priori less in favour of governments, shows a higher average of local taxes is, a priori, proof of its exactitude. One of the causes is that various taxes have been included in local taxes which correspond to the provision of services (but which cannot be assimilated to the payment of fees)³⁸. This more accurate assessment of the proportion of local taxation does not modify the "ranking" of the different sources, based on the portion of income they represent in local budgets.

The first, somewhat unpleasant surprise, lies in the extremely important position henceforth held by transfers, which can only be partially explained by the inclusion of shared taxes³⁹. In all, resources from transfers - shared taxes, specific grants, general grants and others - on average represent nearly half the local resources of Council of Europe member States.

Even if the principal cause for the scale of these figures is the situation of the countries in transition, they nonetheless indicate the extreme difficulty in constructing an autonomous local tax system.

The second source of revenue is local taxes, on average representing a little more than a quarter of all resources. The source covers highly diverse situations which needed to be pointed out in graph no. 3 below, in which the countries are ranked by ascending order of the proportion of local taxes - both exclusive and joint - in income for municipal budgets.

The third item in the table, "fees and charges", may be considered as ranking second in local resources after taxes. It includes both fees paid in exchange for authorisations (such as authorisations to make use of public property) and above all charges paid for services rendered by the municipality, whether they are entirely state-run (i.e. services provided by the departments of the local authority itself) or provided by concessionaires (which may be semi-private or private companies).

An analysis separating the group of the oldest member States of the Council of Europe from the countries in transition makes this "diagnosis" clearer:

In the countries in the first of the above groups, the results are naturally closer to the principles underlying the financial autonomy of local authorities: the gap between the share of taxation and the share of transfers, in particular, is smaller (approximately 33% and 40% respectively). The figures for the countries in transition are relatively different: transfers represent nearly 2/3 of their resources⁴⁰, taxation a little less than 18%, fees and charges and "other" resources (in which the proportion of sales of assets is not insignificant) a little more than 8% each. Capital raising is virtually non-existent (2%).

The distinction between the two groups of countries is clearly demonstrated in the graph below, in which the countries are ranked by ascending order of the proportion of local taxes in their budgets.

The graph shows that only in the municipalities of three of the oldest member States of the Council of Europe is the proportion of local taxes less than 20% of their overall resources: the Netherlands, despite the recent trend, Ireland and Austria. The countries with the highest proportion - around 50% and more - include the Nordic states (Norway, Denmark, Sweden and Iceland), to which may be added the municipalities of Switzerland (46%).

There then follows a second group with local tax shares ranging from 42% (France) to approximately 33% (Luxembourg), to which may be added Belgium, Finland and Germany. It is worth noting that the rate for France is only obtained due to taxes for which the bases of assessment are different from those used by the central State. This is also true of Germany, but only partially so.

The third group ranges from 31% (Italy) to 23% (Portugal), and notably includes Spain, which is very close to 30%, and now leads the United Kingdom (25%).

Amongst the countries in transition, worthy of note is the position of Poland, now with a share of local taxes in its resources of over 21%, after being one of the first countries to set up the legal and administrative frameworks for local self-government.

Readers who wish to obtain information about the most significant trends in local taxation over time may refer to the statistics on tax revenue published by the OECD, which provide data on the trends between 1975, 1985 and 1994 on local taxation in relation to the overall tax resources of the States belonging to the organisation. The most important positive trends concern Spain, Italy, France - although the latter country started with a higher level - and Iceland. Negative trends can be seen for the United Kingdom, but also to a lesser degree for Germany and Austria.

In all, therefore, study of the various data tends to moderate a certain number of preconceived ideas, and in any case shows that the struggle for truly autonomous local resources is never completely over.

The distinguishing feature of local taxes is precisely that they can be localised. This may appear to be a truism but it is a real difficulty in the exercise of taxation, one that merging the smallest local authorities only partially solves.

This, in any case, is the reason why the oldest form of local taxation still found in most countries is based on the ownership of property. It initially concerned the ownership of land before being extended, in certain countries at least, to buildings, whether the tax remains based on the concept of ownership or takes into account occupancy of the building or housing. The primary form of local tax historically, therefore, is first and foremost a tax on assets and not a tax on income or on consumption.

The table below shows that this form of taxation exists in the 25 countries in consideration, except for Malta and Sweden. The basis for the tax varies, however : it can still be limited to a tax on land (unbuilt property). This is the case in 4 countries: the former Yugoslav Republic of Macedonia, Greece, Lithuania, and Russia. It can also only concern buildings, as in Belgium, Hungary, Ireland, Iceland, the Netherlands, and Norway. The two taxes can coincide but remain distinct; this is the situation found in Austria, Denmark, France, Germany, Latvia, and Portugal. The same tax can be applied both to buildings and to land (as in Luxembourg, Slovenia, Spain, Turkey and the United Kingdom). The Belgian situation seems to be unique, in that it is the only country in which the basis for the tax is common to both local authorities and to the State (formerly the central government, and now the regional authorities).

Payers of property tax are generally landowners, but on occasion the tax can also be levied on tenants. This is the case in the Netherlands and in the United Kingdom. A similar situation is to be found in France, but in the latter case tenant tax is only one item in a tax distinct from property tax, which is levied on all occupants of rented accommodation or housing, no matter what their status. In this case the tax is termed a household tax. In most cases this type of tax is levied on natural persons; on the other hand it may be levied only on legal entities, while retaining its status as a property tax. This is the case with rates, a mandatory tax levied in Ireland, or the Danish tax levied on buildings which remains non-mandatory.

With respect to the method of calculating the tax, countries use what one might term the "rateable value" or "rateable income" from the asset. Others prefer its "market value" (as in Iceland, the United Kingdom, and Sweden). Lithuania refers to the "estimated value" of the asset. In actual fact, the value is usually assessed by commissions which are more or les specialised, in conjunction with the tax department of the local authority (as in Ireland), or, in most cases, with the tax department of the State (such as in Belgium and France). Germany makes use of a combined system; the body responsible for this, the "Finanzamt", staffed by civil servants of the Land, applies the market value for unbuilt property, the "rental value"⁴² for buildings, and the "productive value" for forests. The classification of property in the United Kingdom is performed by a State department, the "valuation office", assisted by private consultants.

All these assessments are subject to periodic revaluation, often on a fixed-rate basis (annually in Spain, biennially in Denmark, and at more or less regular intervals in France).

Property tax represents a variable portion of local tax revenue, which can range from 100% in Anglo-Saxon countries⁴³ to relatively symbolic sums. It is worth noting that property tax represents nearly 17% of local revenue in Belgium, 14% in Spain and in Italy, 12% in Latvia, 11% in Iceland, 10% in France, slightly less in Portugal (8.8%) or in the Netherlands (7.6%). It represents very little in Denmark (4%), Russia (2.4%) or in Luxembourg (2%).

OECD statistics appear to be a little more generous: in 1994, property tax apparently represented approximately one third of local tax resources in the unitary countries belonging to the organisation. The proportion seems to be higher than 40% in the federal States. Above all, these statistics make it possible to measure the positive impact of the tax reforms carried out in certain countries.

The change is quite clear in Spain and Italy, but also in Portugal, where property tax represented 37.2% of all resources in 1994, but existed neither in 1975 nor in 1985, the other reference years used for comparison.

The portion apparently decreased above all in Denmark and Luxembourg, but also in England and Austria.

These apparently positive data must be tempered not only in the light of the total of local taxes in relation to overall resources (if property tax represents a third of local taxes in Turkey, that portion must not hide the fact that the sum total of local taxes only represents less than 5% of overall resources), but also after taking into account the overall trend in the proportion of local taxes in relation to all the taxes levied in the different countries (a statistic which is also provided by the OECD): apparently the portion has generally decreased since 1975, dropping from 12.5% to 11.8% of GDP. The fall seems to be particularly significant in the United Kingdom and in Ireland (respectively dropping from 11% to 4%, and from 7.3% to 2.3%), both of which are countries in which property tax is a priority source of revenue.

Based on these findings, this type of taxation has apparently come up against a certain number of limitations:
6.1.2 The limitations of property tax

- It is extremely difficult to evaluate its bases of assessment in so far as real estate is a relatively narrow market, making it impossible to determine the true market value of property. The result is highly unwieldy administrative valuation systems which can only be correctly applied over a time-scale of ten years and even longer: the last valuation in Luxembourg took place in 1941, and in no way is a special case. Revaluations occasionally find themselves enclosed in a vicious circle: they require a great deal of time (counted in years), but the longer they take, the greater the variance between assessed and real market value, such that governments hesitate to take the new valuations into account, for fear of the excessively high transfers of charges they may incur between tax-payers. This is what occurred in France, for instance, with the Act taking into account the results of such a valuation process. Although the Act was passed by both Chambers in 1991, it has yet to come into force.

- The tax is not very buoyant, all the more so because it is very difficult to tax land over and above a certain threshold, given that the income landowners are likely to derive from it has considerably decreased in relative terms. It is not rare, for example, in France for the "unbuilt" property tax to be higher than the annual revenue from the lease paid by a farmer of agricultural land.

- The tax is relatively blind, in that it gives little consideration to the social situation of the tax-payers.

It was on the basis of these various reasons that the rate reform was undertaken in England and replaced by a poll tax. The reform having resulted in the well-known political difficulties, the British government had no other alternative than to revert to a proprietorial basis of assessment with the "council tax". The operation, however, resulted in a drop in the proportion of local taxes, the difference with the revenue from rates being compensated by an increase in Value Added Tax (which rose from 15 to 17.5%), and thus, from the point of view of the local authorities, in an increase in resources from transfers. On the other hand, at approximately the same time (1992), Italy showed that the creation of a municipal property tax could be appropriate, thereby reinforcing local authorities’ own tax resources. The tax was entitled the council tax on property (ICI).

A certain number of other taxes may also be connected to property taxes, such as the tax in France on the removal of household rubbish, which is levied on the same basis of assessment.

The conclusion that can be made from this brief overview is that property tax, despite the criticisms that may be laid against it, remains the most natural of local taxes. It is precisely for this reason that most of the new democracies have already enacted it.

It cannot meet the necessities of local self-government by itself, however. Most States have therefore supplemented it by resources based on another form of tax logic. Two groups in this respect stand out quite clearly: those States which have set up their own local tax on business activities, and those which have made use of the resources deriving from income tax. No State, however, has established an exclusive tax of this type. The solution has been found in a basis of assessment common with the State tax system.

6.2 The principal supplementary taxes: local tax on business activity, and standard income tax:

These taxes are the two main items currently to be found in local taxes. When they exist, they often represent not only the largest portion of taxes controlled by local authorities on their own in Europe, but frequently also the majority of their resources (58% of all the resources of Swedish local authorities for example stem from income tax, and approximately 50% of French local authorities’ own tax revenue stem from Trade tax⁴⁴). Major taxes on business or income taxes are often exclusive in the countries in which they exist, somewhat moderating the statement made by King and Jéquier in their report for the CDLR, that "no European country has secured a high local tax yield without having a local income tax"⁴⁵. Although there may be no other exclusive local income tax (it is always common to the local authorities and to the State), the same does not apply to taxes on companies which, when they exist, are all exclusive local taxes first and foremost, apart from one exception⁴⁶.

Local taxes specific to companies are to be found today in Belgium, France, Germany, Italy, Luxembourg and Spain⁴⁷. Income tax levied and collected by local authorities is mainly to be found in the Nordic countries (Denmark, Finland, Iceland and Sweden), as well as in Belgium and Switzerland.

Local taxes on business activity are relatively numerous and varied. As we shall see later (in subsection 4.3, "Other categories of taxes"), they can also be levied on production, consumption (or sales), trade and changes of ownership. The main local tax on business activities to be found in the six countries mentioned above is a company tax.

The first difficulty the legislators in these different countries have come up against (and the tax has been created recently, notably in Spain, and particularly in Italy), has been the definition of its basis of assessment. There is no homogeneous system in this respect. The main item taken into account can be profits (Germany, Italy, Luxembourg, Portugal), capital assets (France), the number of persons employed (Belgium, Spain), or more specific items such as motor power (Belgium)⁴⁸. This primary item can be taken into consideration on its own (as in Luxembourg since 1 January 1997), or jointly with other items, such as capital assets (Germany), wages and salaries (France⁴⁹), surface area (Spain and Italy), electrical power (Spain), or the sector of activity (Spain and Italy). They may or may not include the "independent" professions (doctors, lawyers, notaries public etc.).

Given these conditions, one may wonder why this tax is not more widespread, and why it is periodically queried in the countries in which it does exist.

Here we come up against one of the obstacles in the development of local and, a fortiori, exclusive taxes. Local authorities find themselves competing with the State (which in most cases itself raises a tax on company earnings⁵⁰). They are above all the victims of two contemporary economic factors: developing competition - more particularly within the framework of a single market such as that existing between the fifteen member States of the European Community - and the increasing scale of unemployment. The companies and those that represent them easily decry what they consider to be a surtax, and which is also detrimental to an objective - local development - to which local authorities are naturally responsive. To this may be added certain technical considerations: the localisation of the tax may make its collection difficult, since large firms generally have several establishments dispersed around the national territory; does this mean priority should be given to the site of the head office, or should revenue from the tax be redistributed between all the local authorities that provide services for the benefit of the company in question etc.? All of these are questions that have naturally been raised and resolved in different ways from country to country. Although company tax has a particularly high yield it also leads to considerable inequality of resources between local authorities, above all when it is raised by authorities that are small in scope.

These facts and findings have recently led to numerous debates that have occasionally resulted in major reforms: pegging of the tax in relation to the added value produced by the company and government compensation (France), exemptions such that only the largest companies are accountable (Germany⁵¹), the establishment of financial equalisation funds (in France⁵² and Luxembourg), the withdrawal of certain items in the basis of assessment (such as capital assets, in Luxembourg and in Germany). In Germany in particular, provision has been made to withdraw the part of the Gewerbsteuer [corporation tax] applied to working capital (Gewerbekapital steuer) and to reduce the part applied to earnings (Gewerbeertragsteuer). The loss in revenue for the municipalities will be replaced by a share in the VAT which until now had only been shared between the Federation and the Länder. The Italian tax known the "municipal tax on commercial or artistic activity" (ICIAP) which was introduced in 1989 and represents nearly 3% of all revenue could fall victim to the aim to create a regional local resource in favour of those regions which have none as of yet (a tax to finance regional self-government which is to be based on added value (IREP), provided for by statute no. 662/1996). After an in-depth study of a reform in 1996, the basis of assessment for the French Trade tax should not be substantially affected. On the other hand, its collection may be encouraged at a municipal group level.

It is understandable that under these conditions, an income tax collected locally should seem preferable on the basis of simplicity.

This is the solution adopted by the Nordic countries - this type of local tax has been in use in Sweden since 1928 - not only for their municipalities but also for their counties, when such exist. This type of tax represents a major share, if not virtually all, of local resources. In 1997 the Icelandic municipalities hoped to obtain no less than 55% of their resources from this type of tax. In 1995, local income tax represented 91% of municipalities’ local resources in Denmark, and 90% of their local resources in Finland.

- simplicity first of all. Although it is not mandatory⁵³, the basis of assessment is the same as that applied by the central government. This may also make collection easier (the local tax in Iceland is collected by the State at the same time as its own the national tax). The only true difference concerns the way in which the tax is calculated: the rate voted by the local assembly is applied on a proportional basis, as opposed to that prescribed by the national parliament which is applied on a graduated basis. This is in keeping with the difference in philosophy between the two types of tax system: that of the State is designed more for redistribution, whereas the primary aim of local taxes is to provide local authorities with the resources they require to fulfil the objectives they have decided in common.

- This tax is without doubt also more equitable in that it can be adjusted for inflation both continually and in uniform fashion. It also has the advantage of reducing the disparities in taxation over the national territory that the traditional local tax system is often accused of accentuating.

- its base is limited by the options decided at a higher echelon, particularly with regard to exemptions⁵⁴. It is a tax which lacks "legibility", in that local tax policy and national tax policy are hardly separable. It is also to be feared that being constrained by exemptions decided on grounds of social policy - albeit perfectly comprehensible - the tax only partially satisfies the purpose of a genuine local tax, which is to share the cost of services between all the inhabitants benefiting from them. The result is that it is not infrequent for the number of "local" payers of income tax to be higher than the number of "national" tax-payers (the difference is to be found in France, for instance, in the ratio between payers of household tax and payers of national income tax⁵⁵).

Whatever the methods employed (i.e. through coercion or through co-operation), a basis of assessment common to both local authority and State in an area in which changes have an immediate impact on the citizen, necessarily results in the fact that the government cannot afford to disregard the options taken by local authorities in terms of tax rates. For instance, the fact that the Norwegian parliament each year prescribes an upper and lower ceiling on the tax rate results in a local income tax rate which is virtually uniform throughout the territory of the country (which also happens to be aligned with the highest rate). Similarly, in Iceland, it is illegal for a variation in the local tax rate, when added to that decided by the State, to exceed the highest marginal tax rate.

With respect to the Charter’s stated wish to have diversified local resources, one may also wonder whether it is advisable for local authorities to be so basically dependent in this way on a single type of tax resource. There is another system in Belgium of "cents added" to income tax, but the sums collected in this manner are no higher than 16%, or little more than the revenue raised through the country’s building tax (an advance on income tax payable on immovable property).

Finally, these examples show that when choosing taxes, be they local or not, it is equally impossible to adopt national cultural preferences. It is significant, for instance, that there is no local income tax in the countries of southern Europe, which traditionally have little inclination for direct taxation, and still only have a relatively low-yield income tax at the national level, thus lightening the burden for tax-payers.

This brief overview in any case shows that there is no ideal local taxation system, and that attempting to localise, as a factor contributing to self-government, only limits the imagination - generally considered to be fertile where taxes are concerned - of reformers in this particular area.

Despite this, the three types of main tax outlined above are not the only resources to be found when examining the situation in different countries.

First of all, we should put to one side those tax resources stemming from what is occasionally termed "pocket-money revenue", the introduction of which is generally left to the initiative of local councils. The main characteristic of these resources is their high degree of diversity, but also their low yield, to the point where elected representatives are often led to assess their cost-effectiveness, in countries in which such revenue is still provided for by the legislator. The current situation illustrates the high number of possible solutions of this type (we counted 135 in all)⁵⁶. The most characteristic tax in this category is of course that applied to pet dogs which is to be found in many countries such as Finland, Germany, Russia, Sweden etc. (but not France). Also worth citing are the taxes on entertainment, advertising and "bill-boarding", markets, gambling and betting, on residence tax (adopted by municipalities with a high tourist population, such as in Greece, the Netherlands or France), or on secondary residences (in Belgium and Germany in particular), etc. Altogether these taxes represent little more than 1% of all resources.

A second category of supplementary taxes is that concerning consumption or sales. Amongst those worth citing are the tax on drinks in Austria⁵⁷, which represents a significant portion of resources (approximately 4%), and the generally high-yield tax on electricity consumption found in France, Italy and Greece, for example. These taxes, above all those applied to retail sales, were much more commonplace in the past, but in most cases they have become incompatible with the general adoption of value added tax⁵⁸. Indeed, as we shall see, their withdrawal has often resulted in the creation of transfer resources to compensate for them.

A separate category must be included for the fast-developing taxes that have a link more or less direct with environmental protection. To the traditional tax on the removal of household rubbish have been added taxes on sewers or on sanitation (the Netherlands), or on waste (Belgium, Iceland). No doubt they are destined to rapidly grow, despite the increasing degree of privatisation of this type of service, because of the cost these operations will entail in the future. Worth noting also is the special tax in Greece on the "cleaning and electrification of public sites", which is of considerable importance for municipal revenue in the country.

If, however, in addition to the three main types of tax previously described, we had to isolate the local taxes with the highest yields that have seen relatively wide-scale development in recent years, worth citing might be the taxes on motor vehicles and on the conveyance of real estate, both of which are based on localisable property subject to tax and are buoyant in relation to the economic situation.

The tax on the registration of automobile vehicles has become more widespread as a result of the recent reforms on decentralisation and the related need to find State tax resources to transfer. The tax is worth mentioning, even though it has not always been to the benefit of municipalities. The Italian provinces, for instance, were authorised to raise a surtax on this type of tax, which was then transferred to the ordinary regions; since 1982 the regional authorities in France have had the same opportunity, and since that same date the départements can make use of the revenue raised by the road-fund licence, which is based on vehicle horsepower; in Portugal and in Spain, however, the revenue constitutes a municipal resource.

The tax on the transfer of ownership of property is an integral feature of new resources. It is to be found in Spain in particular in the form of a tax on the capital gains realised further to the sale of land. The tax is particularly well-suited to local life, since it provides supplementary income for the town planning operations that municipalities generally perform⁵⁹. A tax on property transactions has been introduced in Portugal for the benefit of municipalities; in France, together with the départements, the latter also have the benefit of part of the old conveyance dues that formerly were a source of income for the State.

Amongst the new democracies, Slovenia has also introduced a tax on transfers free of charge of the ownership of property (i.e. including both donations and inheritance). The former Yugoslav Republic of Macedonia has taken the same measure.

Equally as much as the scope and type of taxes, however, consideration should be given to the ability of local authorities to define their basis of assessment and amount.

In order to determine the ability mentioned above, several factors must in turn be taken into account; amongst these, the most important would seem to be the varying degree of discretion local authorities can exercise in varying the rate of taxation.

As we have already remarked, contrary to a fairly widespread belief, full discretion in determining the basis of assessment is not, in itself, a significant factor in local self-government. This can be explained on the grounds of principle, according to which the concept of local self-government only has meaning inside a coherent legal framework, the ultimate control of which is held by the elected representatives of the people at the national level. If this is not the case, there is no self-government, only independence. Under these circumstances, however, there is no problem other than psychological in being subject to the general will as expressed by statute.

Defining the basis of assessment for taxes naturally falls within the responsibilities of the domestic legislation, although a certain degree of adaptation may be left to the discretion of elected local councils by means of regulations. Amongst others, these may concern parties exempt from tax, but may also apply to the basis of assessment itself, given that it is relatively simple and its evaluation by local councils is unlikely to be prejudicial to the principles of equality amongst citizens. Very frequently, however, determining the basis of assessment also requires technical knowledge and means that go beyond those held by a local authority even of some scale.

Another issue is that of the practical calculation of the basis of assessment in particular circumstances. As we have seen with respect to property tax, the basis can be left to the administrative services of the local authority, which are often closer to, and therefore more apt to evaluate, the situation in the field (such as the family context).

In the same spirit of mind, a further issue concerns the accountability for collecting the tax.

Entrusting the collection of taxes to the administrative services of a local authority may guarantee its efficiency, since they would be directly interested in its yield. On the other hand, there may be an advantage, particularly in terms of overall cost for the country as a whole, in having a centralised system overseen by a specialised government department, above all if, as we have seen, the collection is a complex operation (in the case with a company located in the territory several municipalities), or, in the opposite case, if a common basis of assessment with the national taxation system naturally makes it easier to carry out both operations in relation to the same tax-payers at the same time. The options taken by different countries in this respect do not seem to be related to the degree of centralisation within them. The option taken may also closely depend on the history and on the presence or absence of a territory-wide network of central or regional government departments in addition to local authority services.

Finally, in so far as this point has been developed in the experts’ reports, the situations in the different countries in the sample seem relatively disparate, although there is a certain tendency to let the local authority collect exclusive taxes.

Exclusive local taxes, and property tax in particular, in principle are raised by the beneficiary authority in Belgium, Denmark, Finland, Ireland, Luxembourg, the Netherlands, Sweden and the United Kingdom. This is not the case, however, either in France⁶⁰ or in Portugal. Naturally, the collection of joint taxes is usually entrusted to the State. This is the case in both Belgium and Iceland in particular.

The right of recourse to taxation held by the elected council of a local authority in order to secure its resources might also appear to be a decisive factor for local self-government. This is only partially the case, however. In fact the more or less mandatory nature of taxation depends on the legislator, and even if that right were applicable to every category of tax, the very difficulty in obtaining resources would itself result in taxes being adopted. One might also suppose that the mandatory nature of most taxes is a means of ensuring local authorities do not deliberately under-tax their citizens, in order to depend principally on income from special or general grants provided by the central government.

There are various solutions to this issue, depending on the country in question. They often vary in relation to the type of tax, but it is rare for a major local tax to be non-mandatory. For those taxes that are non-mandatory, the right of recourse to their introduction is above all symbolic, all the more so because it is often accompanied by prior authorisation from the government (as is the case in Luxembourg and in the Netherlands).

Property tax is in principle mandatory in every country. There are exceptions in Belgium, Germany, the Netherlands, Norway, Slovenia, Russia and the United Kingdom. A further exception is to be found in Denmark for unbuilt property (but not for built real estate).

Income tax is mandatory in the Nordic countries. It is non-mandatory in Belgium and in Portugal, where its role as a supplement to the State income tax is clearer.

Corporation tax is only non-mandatory in Belgium and in Germany (where it is nonetheless the primary source of tax income for budgets) and in Spain, with respect to capital transfer tax alone.

The principle is inverted for those categories of taxes we have classified under the "Other" heading, forming something of a "range" of options open to local authorities according to their priorities and to whatever corresponds best to their requirements. This is the case with the Spanish tax on capital gains from property deals, for instance. Taxes on assets (private and corporate) are on the other hand mandatory in Norway, as is the tax on gambling in Portugal, and as are the special taxes (on leisure activities, advertising and insurance) to which local authorities in Turkey have a right of recourse.

From the standpoint of the Charter and in practical terms, this is the most significant variable, of course.

The ability to change rates must not be considered independently from the institutional context, however, and in particular from the budget supervision system in existence. Subject to this major reserve, in relation to which the reader is referred to the previous experts’ report, complete freedom for councils to determine the rates of local taxes appears to be relatively rare.

In terms of the main taxes, freedom of this scope exists, in theory at least, in Belgium and in Germany (for every tax), as well as in Finland and in Iceland (for income tax). Freedom appears to be the rule, but there are other exceptions to it with respect to minor taxes, the introduction of which is generally non-mandatory (exceptions exist in Portugal and in Turkey).

At the other extreme, the rate is always determined by the State in Greece (for mandatory taxes), in Malta, in Portugal (except for the derrama and unbuilt property tax), and in Turkey. The same situation is to be found, of course, in some of the new democracies (such as the former Yugoslav Republic of Macedonia and Latvia for built real estate tax).

The most widespread situation is one in which the power to determine tax rates is regulated, either by imposing "brackets", or "ceilings". The buoyancy of the different rates can also be subject to "linkage" (such as in France where the corporation tax rate is linked to the local household tax). Also in recent years, governments have tended to resort to temporary measures of rate freezing (Sweden), or rate capping (as in the United Kingdom).

Examples of rate pegging determined by the domestic legislation include the property tax rates in Austria, France, Hungary, Ireland, Iceland, the Netherlands, Russia etc. Other examples include the derrama in Portugal or income tax in Sweden. In Denmark, the preferred method is apparently that of government "recommendations" based on dialogue between the State and national associations of local authorities (a practise known as "budgetary co-operation"), in which in principle each local authority is at liberty to follow such recommendations or not as they see fit.

Examples of "brackets" worth citing are those applied to the unbuilt property tax levied on landowners in Denmark (ranging from 6% to 24%, which is relatively wide), the property tax in Italy and in Portugal (where the bracket ranges from 0.7 to 1.3%), and most local taxes in Spain. The table entitled "Different Categories of Local Taxes" is designed to provide as accurate an overview as possible of the situations existing in the different countries in this respect.

The tax rate may also be a determinant variable in the amount of general grants paid by the State⁶¹. A survey of taxes, therefore, cannot be totally separate from that of transfers.

As we have seen, transfers now represent the primary source for funding local budgets. We have already looked at that development, which is all the more cause for concern with respect to local self-government because it is an on-going trend. The study of taxation has shown that several existing local taxes had been, or were about to be, withdrawn and replaced by transfers. That is the situation in the United Kingdom in particular, it is currently being considered in Germany, and may be the case in Italy in the near future.

The study of transfers from the standpoint of the Charter is therefore all the more necessary. It is therefore worth examining the various forms of transfer in turn, and assessing their relative importance. This is the purpose of the following table, which distinguishes between three different types of transfer: shared taxes, general grants and specific grants. These categories, however, do not allow for every type of transfer. As for taxes, therefore, proceeding in the same manner as the CDLR experts, we have been led to isolate a remainder category. As far as possible, just as for taxes, we have tried to narrow the analysis in order to minimise the content of this final category.

Beforehand, a few issues concerning the various functions possible for this type of resource need to be discussed from the point of view of local authorities.

The first of these functions is to provide income for budgets, if, as we have seen, the more "standard" resources, namely taxes, for councils entrusted with the autonomous management of the affairs of a community to which they are accountable, cannot be adequately provided, for reasons which may be both technical and political. The quantity of transfer defined by domestic legislation corresponds first of all to the fair redistribution of overall revenue as a function of the share of public functions fulfilled by each level of power and responsibility. The equivalence principle, therefore, must also apply in this case. It is also upheld that the transfer resource would be better suited to use as compensation for the performance of new powers and responsibilities delegated to the local authority. This is a point that will need to be elucidated when examining competencies, since the answer may vary depending on whether the competencies are indeed new (in other words, transferred or assigned in definitive fashion), or "delegated", i.e. exercised by an agent on behalf of another local authority (usually the State). One point of discussion will concern the nature and duration of such agency services, and the answer may vary depending on whether the case concerns a federal State without any administrative network of its own (such as Germany), or a unitary or federal State with its own network of services spread throughout the territory.

In the former case, the concept of power delegation is virtually a structural feature of the organisation of the State, and the fact cannot be excluded that amongst its corresponding "structural" resources there may be a share of tax resources; in the second case above, in which the delegation of power is temporary and therefore revocable, a transfer would indeed appear to be more suitable. The concepts of shared taxes or general grants correspond fairly well to this logic of income and compensation. For the allocation of these types of transfers, the concepts of minimum or "standard" resources are occasionally used in order to exercise "basic" competencies. Although comprehensible, the logic may nonetheless turn out to be hazardous, since the concept of service is liable to introduce a certain number of subjective elements (examples are to be found in the new democracies).

The logic of budget revenue implies that transferred resources be as unrestricted as possible since they correspond to the exercise of the local or regional authority’s own powers and responsibilities, or those that have been delegated in structural fashion. Care must also be taken to ensure the transfers are structurally buoyant as well, in order to be considered by the local authority as equivalent to tax resources.

Table 4: Breakdown of Transfers - Figures as a percentage of general municipal revenue

The second function is that of assistance, which fits in perfectly well with the logic of "subsidiarity", using the "second sense" of the term, to coin an expression adopted by the Congress, namely, assistance provided to a lower level authority to permit it to carry out a competence, which, in certain cases, may exceed its own capabilities, rather than have the competence exercised by the higher authority⁶².

This second function corresponds equally well to the concept of specific grants, i.e. financial aid to carry out a task or realise capital investments, as to that of general grants, which authorities may freely dispose of.

In principle, specific grants are usually earmarked for capital expenditure, whereas general grants are more global in nature, and often relate to current expenditure. Other categories of transfers halfway between general and specific are becoming increasingly widespread today, such as grants designed to ensure the performance of a specific competence (social work in the Nordic countries, health services in Italy, education in France). Their scope and scale can provide freedom comparable to that afforded by larger grants as long as the sums in question are sufficiently large and the transfers are not accompanied by over-precise provisions. Only concrete analysis permits these transfers to be classified in one or the other category.

The third function of transfers fulfils a purpose whose importance is commensurate with the scale of powers and responsibilities exercised by the authority, and justifies funds, if not equal, at least comparable throughout the territory (social services, education etc.). This is the financial equalisation function. Its purpose is to compensate for inequalities arising between municipalities as a result of their size and local tax potential. Specific grants are occasionally seen as having a purpose of financial equalisation, but this is not take into consideration as such, and the distribution of specific grants is rarely based on objective criteria that take into account the characteristics of the municipality. The integration of objective distribution criteria is precisely a defining feature of general grants, which also fulfil the requirement of predictability which is vital for administrators.

One can easily understand under these conditions why the switch-over from specific to general grants has been fostered by the Council of Europe, and the trend in fact does seem to have been in that direction if we consider the relative average share today for each of these categories of transfers, representing respectively 22.87% and 10.32% of local resources, or a general grant level that has more than doubled, without taking into account the shared taxes which further increase the portion of transfers that authorities may freely dispose of.

It is occasionally difficult to distinguish between transfers designed to produce financial equalisation and those whose purpose is simply to provide revenue for local budgets, for instance by refunding part of the taxes levied within the municipality. The logic behind each type of transfer is not always clearly distinct, and financial equalisation can be achieved equally well by redistributing the income from a shared tax (as in Austria or Germany) as by distributing a general grant. Indeed, the latter can quite simply be the cumulative result of shares of a general grant with a different purpose. This is the case, for instance, with the block grant for current expenditure in France, developed to gradually replace the old bases for the local tax, withdrawn in 1966 when Value Added Tax was introduced, with sums based on the objective evaluation of the requirements of each municipality.

The principles and rules of financial equalisation can be both extremely variable and highly complex, since they are always the result of power struggles between the various categories of authority.

As a result, as well as population, other data can be taken into account such as the surface area or length of roads that have to be maintained, the number of pupils of school age, the population of elderly persons, or the situation of the municipality from the point of view of social housing, all of these data being taken into account to varying degrees depending on the target priorities.

The criteria themselves are very often weighted by an assessment of the real tax potential of the municipality, and even the tax burden it bears upon its citizens ("help yourself and heaven will help you"). Transfers thus appear to be a convenient (and therefore tempting) means for the practical implementation of policy options that have been defined at the central level. The result can be a complexity as well as an occasional variability that is detrimental to their "legibility", and sometimes partially distorts their purpose. This explains why the accumulation of criteria combined with the growing scarcity of resources at the central level can result in the paradox of a reduction in the sums available for financial equalisation. The tendency that can be seen in certain countries, therefore, is to revert to criteria that are simpler, but which are less oriented towards the objectives of redistributional equity.

This type of transfer seems to be part of an intermediate category, halfway between a tax and a grant. It is distinct from the former, however, in that its purpose is to redistribute income obtained by applying a rate fixed exclusively at the central level.

The shared tax system has one advantage, however: that of providing a clear reference and ensuring the development of local authorities resources parallel to those of the State.

The table above shows the relative importance of this type of tax in the local resources of the fairly limited number of countries that use it in order to provide income for local budgets. It is worth observing that Germany and Austria, the two countries most commonly cited as examples in this case, are not those which make use of it most frequently. The examples of the Czech Republic (CS), Latvia (LV), Romania (RO), Slovenia (SL), Estonia (EE) and Russia (RU) demonstrate that the system can be convenient in countries in transition.

The taxes that are shared are various. It seems that they are most numerous in Austria (21). The most frequently used seems to be income tax. Revenue levels from it for the local authorities in Austria, Germany, Greece, Hungary and Slovenia respectively stand at 18, 15, 20, 38⁶³ and 30%. The criteria employed do not seem to have completely stabilised in Latvia (where the share can vary according to the local authority) and in Russia. Business tax in the United Kingdom⁶⁴ and in Latvia is shared. As we have seen, corporation tax in Germany remains a local tax of which the municipalities only retain 35%, the balance being paid back in equal proportions to the Federation and to the Länder. VAT is shared in Austria (12% for the municipalities) and in all likelihood will soon be so in Germany as well. The same applies to the tax on fuels in Austria (3%), excise in Russia, the road-fund licence in Greece and in Hungary (50%), and property conveyance fees in Greece (3%) and in Slovenia (70%). In Denmark, the municipalities receive one third of the revenue from the capital gains tax, and a small share of the national corporation tax (3/25 of the taxes raised are paid back to the municipality in which the company has its head office).

As has already been indicated earlier, the logic of redistribution can vary in relation to the tax: salary tax in Austria is initially redistributed between the Länder on the basis of demographic criteria, while for income tax it is the criterion of the collected tax which is adopted. Sub-distribution is carried out by each Land thereafter on the basis of population densities and tax potentials. In Germany 15% of the income tax received by the Länder is redistributed to the municipalities. The Länder are also held to reconvey a share of the taxes they receive from the Federation. In Greece, 80% of shared taxes are redistributed on the basis of the number of inhabitants, and 20% on other criteria. 1/3 of the sums have to be earmarked for capital investment.

With more than one fifth of all resources, general grants henceforth represent the greatest share of transfers. The proportion seems to be particularly high in a large number of countries, as the following graph shows. Overall, except for a few of the countries in transition (Estonia and Romania in this case) and the United Kingdom (which only recently adopted the concept of shared tax out of necessity), the countries which have opted for shared taxes make little or no use at all of the block grant system, which confirms the fact that the two types of transfer are relatively similar in their objectives: to supply local authorities with general resources or those that they may freely dispose of.

This general trend is relatively recent: block grants were only introduced in Sweden and in Finland towards the mid-90s. The paradox, however, is that the United Kingdom⁶⁵, formerly a pioneer in the field, today finds itself somewhat at the back of the field (the share of specific grants has more than doubled in 20 years)⁶⁶. Similarly, the graph shows that the extent to which certain countries depend on this type of resource is no doubt too great (for five of them⁶⁷ more than 50%).

Calculating the amount of these grants need not obey rules which are fundamentally different from those currently used for shared taxes, since many block grants correspond to the withdrawal of a former local tax⁶⁸. They should therefore be analysed more as a means of compensation for loss in income than as a "donation" from central government. In this way, in France, the block grant for current expenditure [dotation globale de fonctionnement (DGF)] which replaces the local tax is a fixed share of the Value Added Tax and is indexed, thereby allowing the transfers in favour of local authorities to grow faster than State revenue. As a result, income for the funds allocated to financial equalisation is frequently based on "keys" applied to the revenue from certain State taxes. This is the case, for instance, in Luxembourg (based on a key of 18% on income tax, of 10% on VAT, and of 20% on the road-fund licence), in the Netherlands and in Spain⁶⁹ (with a fixed annual percentage of the main State taxes).
Just as shared taxes are not always used only as budget revenue, so general grants are not systematically allocated to financial equalisation. In Sweden, for instance, admittedly an example of a particularly sophisticated system, block grants are distributed through three funds, each of which is based on a different, clearly identified logic: a general grant with no financial equalisation purpose is allocated only on the basis of the number of inhabitants in a municipality; a grant to equalise resources is destined to compensate for an inadequate tax potential in relation to the national average⁷⁰; and a grant to equalise charges is distributed according to an evaluation of charges by an independent agency based on 15 different criteria.

More generally, with respect to the distribution of grants, the number of inhabitants usually constitutes the primary criterion (Finland, Luxembourg, Sweden, Turkey). The sum paid on this basis can vary, however, in relation to the demographic category (France⁷¹), or to the structure of the population (Latvia). Surface area is the second simple indicator of requirements (it is one of the two main criteria, together with population, taken into account in Luxembourg by the municipal fund for financial grants). The efforts of imagination used to define other criteria are limitless. We have already given certain examples above (see section 5.1, on the different functions of transfers). In Hungary, a secured amount of grant (called the "mandatory grant") is transferred to local authorities, calculated in relation to the theoretical cost of 20 categories of municipal services. In Slovenia there is a similar system of evaluation of mandatory competencies (the grant on average represents 32% of the sum obtained in this way). In Portugal, 8 "objective" criteria are taken into account.

The criteria are different and combined in varying proportions with criteria of wealth, and occasionally tax potential as well.

In France, the inadequacy of tax potential is calculated on the basis of all local taxes; in Italy, the equalisation fund for tax inequalities takes into account the inadequate yield of corporation tax, in Denmark integrate the bases of assessment for income tax etc.

Very often, the grants are made through "funds" which pool the resources of diverse origins, as in Belgium (the municipality fund), Luxembourg (the municipal fund for financial grants), Portugal (the financial balance fund⁷²), the Netherlands (the municipality fund), and Turkey. These funds are occasionally administered by boards of trustees or are assisted by advisory bodies elected by local authority associations (such as the local finance Council in the Netherlands). In France, although grants do not transit through any particular fund, there is a Local Finance Commission, established by the same act that introduced the block grant for current expenditure [dotation globale de fonctionnement (DGF)] in 1989. It is this commission which decides, within the limits of statute, the exact distribution of the sums between the various shares of the Grant. In Iceland, the charge equalisation fund is administered by a council composed of four elected representatives and chaired by a civil servant appointed by the government.

The policies adopted by the various countries in relation to the grant system seem relatively similar, but it is difficult, however, to give a systematic overview which is satisfactory, due to the variability, confusion and number of the considerations taken into account in the various systems. After an initial phase during which the concept of block grants has become generally accepted, the time has perhaps come to lay down a few simple principles which could serve as guidelines for assessing the compliance with the spirit of the Charter of the various policies implemented in terms of transfers.

firstly, the amount of grants and the method of establishing them at the national level (a question of even greater emphasis at a time when every state is obliged to adopt restrictive financial policies);
and secondly, the methods of their distribution, in order to prevent an indirect reversal to the over-sophistication of specific grants.

With respect to the trends mentioned above, it is extremely significant that the share of specific grants allocated is henceforth no longer decisive, on average at least.

Very few of the countries belonging to the "first generation" of the Council of Europe figure at the head of the list of countries that still resort to massive use of specific, or earmarked, grants. It is not insignificant that, apart from the United Kingdom, the countries fall within the category of federal states or at least have a high degree of regionalisation. The current trend is to replace or to superimpose specific grants from the central government with earmarked grants from constitutive bodies.

The situation of the new democracies is also worthy of more detailed attention, in that the central government may be tempted to use earmarked grants in order to recover policy control it may have temporarily lost. Mention is made in the Hungarian report, for example, of a trend in recent years to increase specific grants to the detriment of general grants.

In general, the share of earmarked grants is not wholly representative of the influence exercised by the State or its agencies through this means. Specific grants, which mainly relate to capital expenditure⁷³, by definition have a multiplying effect, and their concession is frequently a condition prior to the realisation of a given project. Furthermore, precisely because of its nature, it is rare for a specific grant to be the subject of a co-ordinated policy. It is often left to the discretion of the ministries involved (public works or their equivalent, social welfare, education - if this type of ministry exists - transport). The most distinguishing feature of specific grants compared with block grants is precisely the sectorial nature of the former type of transfer. They are a tempting means for "technical" administrators to gain acceptance for their policies.

Finally, special consideration should be given to earmarked grants, generally termed "balancing" grants, which exist in virtually every country, and are allocated on a basis identical to the regulations applicable to the treatment of deficit budgets.

The transfers listed under the "other" heading [table 5] are more closely related to earmarked grants than to block grants. Apart from highly specific transfers⁷⁴, the largest category we felt should be isolated, and which is highly indicative of a certain current trend in local authorities, is that of contributions from the European Union. The latter now play a significant role in the income for local budgets in Ireland and in Portugal (between 7% and 10% of their overall resources).

Other than through taxation and transfers which are the most important items in their budgets, municipalities can procure revenue in three different ways:

through the fees and charges they levy in exchange for the services they provide to the population, through diverse receipts which may be temporary, for example the sale of assets or capital gains on investments when these are authorised,

or, more rarely, from savings bonds, which local authorities are authorised to issue only under certain conditions and in certain countries.

fees and charges, on average representing approximately 12%⁷⁵, in fact are the second most important item in local resources after taxes. Just as for taxes - perhaps even more than taxes - their extent depends on the initiative of the local authority. There may be a statutory instrument concerning the prices of services, but these are now fairly rare.

The amount of these resources depends in concrete fashion on the regalian prerogatives of the authority (fines for non-observance of local administrative regulations, fees to be paid for permits, such as in town planning) but also constitutes the remuneration for services rendered to the population (transport, the supply of water, where applicable the supply of electricity, of heating etc.). The revenue under this second item closely depends on the policy adopted by the local authority in relation to privatisation or service concessions.

It is sometimes difficult to separate the "fees and charges" item from the "other resources" item which is still too high (6.88%) despite considerable efforts to reduce it, a fact which is confirmed by the greater accuracy of the information provided by the experts⁷⁶. One might also consider that the "other resources" logically should come under the heading of "own resources". We do not propose to categorise it in that manner, precisely because of the uncertainty of the inventory, and also because a significant part comprises non-renewable resources (such as sales of assets, in particular by local authorities located in countries undergoing economic transition).

Capital raising forms the adjustment variable for local budgets, which explains why its amount on average remains relatively limited (5.55%). One may find this surprising, in that it is a perfectly suitable means for funding capital investment.

This "weakness" no doubt is due both to a certain slowdown in investments by local authorities because of the current economic situation and the weight of fixed operating costs (when local authorities are very often by far the most important civic public investors⁷⁷), and to a certain persistence in this particular sphere of control by the central government, when supervision elsewhere has tended to disappear.

Little by little, however, the trend is to replace a priori controls by laying down prudential standards (such as negative covenants on capital raising at short term, other than under exceptional circumstances, and the definition of debt-to-equity ratios).

The question of financial resources, which is essential to the exercise of all types of local powers and responsibilities, seems to be an issue in itself which ought to form the subject of a separate report.
However, it is clear that many references have been made to the way in which financial resources are inevitably linked to the number of tasks actually carried out. This is what we have called the question of adequacy.

We have seen that this concept is difficult to assess in an objective way, for several reasons:

- the difficulty of accurately defining the tasks actually carried out by local authorities as opposed to the state. The first problem here is a legal one: most countries, except federal states, perhaps – and even they may be unwilling - are reluctant to draw up a clear list of all local authorities’ responsibilities. Even if they were to produce such a list, local authorities' exact margin for manoeuvre would still have to be determined. The performance of these tasks is governed by law and often by regulations, which means that such tasks cannot be defined from a purely practical point of view.

- the difficulty of assessing the cost of the tasks carried out by the various types of local authority. Such an evaluation must be partly subjective and may be particularly difficult to carry out since the size of the task carried out may depend on the will or on the wealth of the particular authority concerned. Often, such costs can only be assessed in an approximate way, for example when a law transferring a particular responsibility is passed. Ideally, at such a time, the evaluation used to calculate the resources to be transferred should correspond to the budgetary payments made up to that point by the authority (central or regional) which was previously responsible.

Hence it is not possible in this report to provide a detailed study of both financial resources and the cost of responsibilities at the same time.

Moreover, the working group thought that, in view of the scarcity of comparative financial documentation that was both reliable and concise, the conclusions of the study on financial resources, which merited a report in itself, should be submitted to the Congress immediately. In this way it would be possible to begin comparing these conclusions with previous studies by CDLR experts.

Nevertheless, there was no reason why the working group should not use this report to draw up a draft resolution dealing at least partly with responsibilities, if only to help define the basic content of the supplementary report which would be needed to cover this precise field.

To turn to the substance of the report, the first conclusion to be drawn is that financial resources now constitute a “weak link” in the type of local self-government set out in the Charter.

Of course the Charter supports the idea that resources should come from a range of different sources, which is indeed the case, but the question remains whether the proportion of “own“ resources which local authorities can dispose of freely can be considered sufficient in Europe today.

It seems to us that being able to dispose of non-earmarked transfers freely is not an "adequate" condition for describing them as "own resources". Although we must welcome the fact that non-earmarked transfers have increased to the detriment of specific grants - which is an important and interesting lesson to be learned from the study - they actually remain a precarious form of resource which generally does not carry sufficient long term guarantees, these being, as a rule, the hallmark of taxation.

Besides, and this is a fundamental point, the increasing frequency of transfers has coincided with the establishment of a kind of local democracy which is more “functional” than political, ie one which focuses on decision makers’ accountability to the people they are required to administer.

Unless we are careful, there is a danger that the growth of transfers, which is certainly useful if responsibilities are to be exercised consistently in both quantitative and geographical terms, will bring about a change in the role played by local councillors in Europe: instead of acting as managers, accountable for the monies entrusted to them by the people, they will be expected to negotiate with and even beg from the central or regional authorities. This is a danger about which we think the Congress, as the local authorities' representative body, could issue a warning in order to guard against the risk of governments relaxing as soon as they have introduced the system of non-earmarked transfers.

Efforts could be focused firstly on the development of guarantee mechanisms at the highest possible level given that the economic situation of the member states implies a potential danger that, having generally handed over their powers and responsibilities to local authorities, they will not draw the necessary conclusions in terms of finance. These efforts and warnings are particularly necessary because, more than in the past, the need for monetary stability and the demands of the fight against unemployment could conveniently be used to justify a restrictive financial policy towards local authorities.

In order to indicate more clearly the current levels of local authorities’ financial autonomy in Council of Europe member states and to draw some useful lessons from the exercise, the diagram below divides countries into groups on the basis of their local authorities’ “own resources”, in the strictest sense of the phrase (local taxes plus fees and charges).

More than in the past, the need for monetary stability and the demands of the battle against unemployment could conveniently be used to justify such a policy. Hence the need for vigilance seems all the greater.

We have tried to divide countries into groups on the basis of their local authorities' "own resources", in the strictest sense of the phrase, as shown in the diagram above. Excluding "the former Yugoslav Republic of Macedonia" and Latvia, where the current situation regarding local self-government requires clarification, only 8 countries can boast a proportion of "own resources" equal to or more than 50%.

The average figure is less than 40% (38.69%), while six European Union countries, including one of the largest, are below that average - one of them with under 17% and the others with between 34% and 38%. As one would expect, none of the new democracies, except the two mentioned above and with the reservations stated, are above the average figure. These results which, of course, could be disputed, but not in terms of the overall picture they convey, could be used to alert people to the battles which lie ahead, if only to prevent the current situation from worsening.

As far as the Charter is concerned, lessons which could help in the drafting of future resolutions or recommendations may be drawn from the following points:

- the substantial but nevertheless limited proportion of "own resources" coming from real local taxes, ie taxes for which local authorities may be required to decide the rate, albeit within a framework of upper limits and bands.

- the trend towards a reduction in exclusive taxes, mainly as a result of the difficulty of finding alternative independent tax revenue, this being due both to central and regional governments' reluctance to give up progressive tax revenue and to the technical difficulties involved in replacing or supplementing traditional local taxes which either do not produce a high enough yield or are not "elastic" enough,

- the predominant role to be played in future by transferred resources in funding local budgets, and the simultaneous increase in the proportions of these resources being made available for authorities to dispose of freely (general grants and shared taxes) to the detriment of earmarked resources (specific grants),

- a certain confusion between funding local budgets or compensating for powers and responsibilities transferred in various ways, and financial equalisation; the trend, noted in some countries, of insisting that the practices of local authorities are "standardised" to some extent, at least where taxes are concerned, and the danger that this poses to the exercise of local freedom, which naturally involves a certain amount of variety,

- the value of achieving within the Council of Europe, the only body which deals with local finances from a not exclusively economic viewpoint, a sufficient level of standardisation of budgetary statistics in order to clarify the concept of local authorities' "own resources", which they may dispose of freely,

- the relatively limited use made of capital raising and the fact that this possibility for funding local budgets gives central government the opportunity to continue exercising some form of supervision.

- the need, in order to assess the actual situation of local democracy in Europe, to be able to compare for each country the resources available (and the proportion of these represented by own resources) with the tasks to be carried out, or at least those that are obligatory;

- the difficulty of achieving this aim because of technical and legal problems: the inadequacy of current data on the distribution of responsibilities in different countries; uncertainties surrounding basic concepts and definitions of responsibilities contained in the Charter itself, which need to be clarified, probably by means of a chart analysing the interpretations made by the different countries; the reluctance of most member states to incorporate in a small number of general laws even a brief list of the main responsibilities of the various types of local authorities; the difficulty in any case of objectively assessing the cost of exercising these responsibilities.
- the expediency, even before carrying out a full study, of making the Congress aware of the above points, which need to be taken into account if conclusions drawn from current national situations are to be used to influence the policies of the governments concerned.

¹ Introductory report by Prof. Alain DELCAMP, President of the Committee of Independent Experts on the Charter "The application of the principle of subsidiarity of the European Charter of Local Self-Government", Barcelona, 24-26 April 1997.

² For the conditions of development of the system, readers should refer to our introductory report to the Barcelona Conference, devoted to the implementation of the Charter by the Law Courts (24 and 26 April 1997).

³ The conclusions of this first report are to be developed in the report presented by Mrs. Doganoglu, the purpose of which is to compare the information gathered by the experts and that contained in the opinion drafted in reply to it by the experts of the LRA.

⁴ CPL/LOC/CHARTE (28) 17 rev. 2 "I. Place and procedure for the integration of international law into the legal procedures of the Council of Europe's member states and application to the European Charter of Local Self-Government"

⁵ Including, in particular, a report drafted with a view to responding to CLRAE Recommendation No. 2 (1994) on monitoring the implementation of the European Charter of Local Self-Government, which was examined on 15 and 16 February 1996, and the CDLR's favourable Opinion submitted to the Committee of Ministers on the procedure proposed in paragraphs 8 and 9 of CLRAE Recommendation No. 20 (1996).

⁷ Since published in the “Local and regional authorities in Europe” series (No. 61).

⁸ The methodological problems involved in comparing local finances are considered later in this report. The discussion with the group of experts showed how difficult the task was. Statistics only mean something if they can be compared, but we have to note that there is no common system of compiling statistics in the field of local finances. Rather, there are several systems, each with its own logic, but none of them currently approach the issue of finance from the local self-government viewpoint.

¹⁰ The criterion adopted is that of "public administrations", with the noteworthy exception, however, of the local branches of social security departments, "whose authority covers only part of the economic territory".

¹¹ The OECD has published an interesting series of detailed national accounts for the period 1982-1994, which make a distinction, for each country, between the general accounts of public authorities, those of central government, those of "federal or provincial" governments, those of local authorities and of social security administrations. Unfortunately the series are occasionally incomplete, and the "federal or provincial" government category is not always identified. A curious instance is the absence of the category for Belgium, and its presence for the Netherlands. Also worth noting is the series of statistics on Public Revenue (1965-1995), although they do not always coincide with the data supplied by the experts.

¹² Brussels - Paris, July 1997. DEXIA is a joint venture between the Crédit Local de France and the Crédit Communal de Belgique.

¹³ An instance is the reply from the CDLR dated 11 September 1996 to recommendation no. 2 (1994) which followed on from an initial report drafted by the working group and examined by the Congress.

¹⁴ In all likelihood the working group's report will not be available before the next plenary session of the Congress, scheduled for July 1998.

¹⁸ The exact terms of the Charter are that they shall not "diminish the discretion local authorities may exercise within their own sphere of responsibility" (Art. 9-5).

²¹ The third, fourth and fifth columns correspond to information supplied by King and Jéquier (no. 61, local and regional authorities in Europe); the sixth and seventh columns contain supplementary reference data provided by the experts appointed to assist the Congress working group, or in the absence of any such data, and for those countries belonging to the European Union, the figures which were included in the DEXIA survey mentioned earlier. The figures in italics correspond to data provided by the experts for countries not covered by the CDLR study.

²² If social security expenditure were included, which is reimbursed 100%, Danish municipality expenditure would represent, according to KJ, 26.9% of GDP and 42.3% of GGE

²³ KJ decided to include counties in their statistics, claiming that Oslo, which is both a commune and a county, represented alone nearly half the municipality expenditure.

²⁵ For instance, depending on the country, it may or may not include social security expenditure. We take it to include all public authority budgets (both regional and local) administered by elected representatives and the central Government.

²⁶ For example in Slovenia, the opinion of Professor Smidovnik. The reform of local administration in Slovenia. Directory of local authorities, Paris 1996, p. 157.

²⁷ It is interesting to note that for the latter country the level did not vary between 1984 and 1995.

²⁸ There are analogous although less marked findings in the Hungarian report (where local and regional expenditure dropped as a percentage of general public expenditure from 16.1% in 1995 to 14.12% in 1997).

²⁹ The reference date of 1994 did not allow integration of the reforms that have occurred since.

³⁰ It will be noted that the Charter uses the expression "resources of their own", and not taxes of their own, but it is obvious that the term applies in priority to taxation, which is considered by definition as being the symbol of true self-government.

³¹ The CDLR experts go even further, since they classify them in their tables in the column entitled "exclusive local taxes" (table no. 3), which in this case we find somewhat excessive.

³⁴ The changes are indicated in italics. For the reference years corresponding to the changes made, please see Table no. 1.

³⁵ Table drawn up on the basis of reports by members of the group of experts, the work by the DEXIA mentioned earlier, and in the absence of any such figures, on the statistics included in the CDLR report.

³⁶ In order to make comparisons easier, at the bottom of the table we have included the average for the figures used by the CDLR experts.

³⁸ An example of this is the tax on the disposal of household rubbish. Also worth noting is the fact that the experts’ table includes countries which did not appear in the CDLR table, at least two of which (Lithuania and the former Yugoslav Republic of Macedonia) have fairly surprising percentages of local taxes, but which do not seem to likely to be maintained - alas, one might add - if the trend in the other countries is considered.

³⁹ As we shall see in the following chapter, on average, shared taxes only represent a little more than one-fifth of the "transfer" item.

⁴⁰ Even though the figures for Lithuania and the former Yugoslav Republic of Macedonia, as we have seen, no doubt artificially inflate the proportion of local taxes.

⁴¹ The table is based on data gathered in particular from the experts based on the model table produced by the CDLR experts, in order to make comparison easier. The key is the same: Tax: mandatory: •, non-mandatory: ¡ ; Rate: complete discretion: ¨, limited discretion (imposed bracket or ceiling): ¡, prescribed by the State: n

⁴³ This, of course, is the case with the United Kingdom and Ireland. It is also worth noting, however, that this is also the case in most federal States outside Europe (such as the United States, Canada and Australia).

⁴⁴ Local tax on business is the primary tax resource for local authorities in France, Luxembourg, Germany and Portugal.

⁴⁶ That of Portugal, in which the "derrama" is a surtax to the State tax on company earnings.

⁴⁷ Russia and Malta have just joined the list, but at low and even insignificant levels. The taxes in question are dues paid for the right to exercise a commercial activity (corresponding to the old French concept of a licence).

⁴⁸ In which the local company tax is divided into two: a tax on employed personnel, and a tax on motor power.

⁵¹ Only one third of all companies are taxed, compared with two-thirds in 1975. J. Flejo, Grale/Arcole Directory of local authorities 1997, p. 43.

⁵² There are two funds, one national, the other at the level of the département.

⁵³ The Danish report noted that it is the local authorities who are accountable for calculating the tax, and that (only?) since 1996, municipalities and counties alike may choose a basis of assessment determined by the central government.

⁵⁴ It is worth noting that in Iceland, together with its own share the State pays the municipalities a lump sum for each inhabitant exempted from the tax.

⁵⁵ This is one of the reasons why in the end there was no enforcement of the reform attempting to replace the département portion of the household tax with a tax based on income. The resulting transfers of charges were deemed to be too heavy.

⁵⁶ Based on our own calculations, the average number of taxes effectively raised in 1991 for the 19 municipalities in the Brussels conurbation was 39, the variance ranging from 28 to 63.

⁵⁷ In Germany, the beer tax is reserved for the Länder, and forms one of the rare exclusive tax resources.

⁵⁸ On the other hand, these taxes are increasing in countries where the VAT rate is still low, such as the tax on the sales of computers, alcoholic drinks and insurance in Russia.

⁵⁹ Although strictly speaking they do not involve property transactions, the same applies to the taxes on buildings (Spain), or the taxes raised in exchange for the construction of a public facility which is of particular benefit to a given category of tax-payer (such as the local tax on civil engineering infrastructures in France).

⁶⁰ In these cases it is considered a service rendered to the local authorities by the central administration, and paid for as such by deducting a percentage from the amount of tax collected (for "collection and assessment costs").

⁶¹ In Sweden, for instance, the State grant is decreased by a rate equal to half the rate of increase in income tax.

⁶² On this point, the reader may refer to the previously published report in the collection of studies and documents of the Council of Europe on the "definition and limits of the subsidiarity principle".

⁶⁴ It would perhaps be fairer in this case to speak of a redistributed tax, in that the tax continues to be levied locally but is based on a single rate prescribed by the State. Income from the tax is paid back to the municipalities on the basis of the number of their inhabitants, except for the City of London which is authorised to retain part of the revenue.

⁶⁵ The Rate Support Grant was introduced from 1958 onwards. It is now called the Revenue Support Grant.

⁶⁶ The change in government in Malta at the end of 1996 resulted in a drop of 14% in the amount of general grants to local authorities and their replacement by specific grants.

⁶⁷ This also raises a query about the classification in certain cases performed by the CDLR experts. According to other sources (DEXIA) 67% of transfers consisted of "allocated grants" (to carry out co-management tasks). In the same way in Belgium, the share of general grants is in effect allocated to providing revenue for a municipal fund, but the criteria for the allocation of resources seems to take significant account of the assessment made by the authorities accountable for the grants (henceforth the regions).

⁶⁸ It is worth adding to the examples cited above the case of Ireland, where since November 1996 the rate support grant is also designed to replace the local tax on housing and farming land. It is only since this date that the transfer is destined to be used for financial equalisation purposes.

⁶⁹ The rate is fixed for a four-year period by the domestic legislation, further to consultation with the representative associations.

⁷⁰ In fact the revenue for this grant is produced by a deduction levied on the wealthiest municipalities. It is not fundamentally different from one of the grants recently introduced in France to equalise tax resources, entitled the urban solidarity grant (dotation de solidarité urbaine [DSU]).

⁷¹ The legislator considers that expenditure per capita (and therefore requirements) increase with the size of the municipality.

⁷² In which the grants are partially pre-allocated (40% for investment, 10% for the parishes).

⁷³ Grants covering current expenditure, however, do not seem to be negligible in a country such as Finland (where they mainly involve social welfare or education).

⁷⁴ For example the payment by the Luxembourg government of two-thirds of the salaries for primary school teachers and policemen, who, although employed locally, are civil servants.

⁷⁵ 12.24% according to our figures, 11.72% according to the experts of the CDLR.

⁷⁶ The experts of the CDLR arrived at an average of 12.14%. For certain countries the "Other" item is still too high (25.48% for Turkey, which is an exception in this case) and merits further explanation.

Country	Initials	Local taxes	Fees and charges	Transfers	Capital raising	Other
Albania	AL	2.50	3.00	94.00	0.00	0.50
Austria	A	16.30	21.00	43.70	10.00	9.00
Belgium	B	40.75	6.00	44.26	0.00	8.99
Bulgaria	BG	1.00	10.00	78.00	2.00	9.00
Cyprus	CY	25.00	33.00	30.00	12.00	0.00
Croatia	CR
Czech Republic	CS	16.00	12.00	45.00	11.00	16.00
Denmark	DK	52.20	22.30	24.50	0.00	1.00
Estonia	EE	0.10	0.90	91.00	2.00	6.00
Finland	SF	39.50	24.00	28.40	5.60	2.50
France	F	42.00	8.00	29.00	9.00	12.00
Germany	D	35.00	4.00	32.00	7.00	0.00
Greece	GR	27.00	8.00	63.00	2.00	0.00
Hungary	H	13.00	8.17	63.61	6.71	8.51
Iceland	IS	16.00	21.00	57.00	0.00	7.00
Ireland	IRL	64.20	18.00	5.40	4.60	7.80
Italy	I	31.00	11.00	42.00	7.00	10.00
Latvia	LV	65.00	1.00	29.00	0.00	5.00
Lithuania	LT	6.40	0.00	87.30	0.00	6.30
Luxembourg	L	32.88	24.88	33.16	8.00	0.00
Malta	M	0.50	0.00	97.80	0.00	1.70
Moldova	MOL
Netherlands	NL	15.00	2.00	83.00	0.00	0.00
Norway	N	47.50	12.80	36.20	0.00	3.50
Poland	PLK	21.00	7.00	60.00	0.00	12.00
Portugal	P	23.00	10.80	49.30	7.50	9.40
Romania	RO	5.00	16.00	79.00	0.00	0.00
Russian Fed	SU	22.00	2.50	72.50	0.00	3.00
Saint-Marino	SM	0.00	0.00	31.00	69.00	0.00
Slovakia	SL	10.00	9.00	39.00	5.00	37.00
Slovenia	SV	6.80	13.90	79.30	0.00	0.00
Spain	E	29.80	18.50	27.10	14.90	9.70
Sweden	S	56.00	15.00	20.00	0.00	9.00
Switzerland	CH	46.00	24.00	18.00	3.00	9.00
Ex rep of Macedonia	FYR	62.30	28.80	1.50	0.00	7.40
Turkey	TR	4.76	20.90	48.86	0.00	25.48
Ukraine	UKR
United Kingdom	UK	25.00	11.00	53.00	8.00	4.00
Average		25.73	12.24	49.03	5.55	6.88
Average for data gathered by CDLR experts		18.33	11.72	50.88	6.94	12.14

Country	Initials	% GDP	% GGE	Reference year	%GDP	%GGE	Reference year
Albania	AL	7.7	25.4	1995
Austria	A	12.71	20.18	1993	12	15.2	1994
Belgium	B	4.9	10.9	1993	7.4	11.2	1995
Bulgaria	BG	9	20	1994
Cyprus	CY	1.4	4.1	1993
Croatia	CR
Czech Republic	CS	9.3	20.9	1994
Denmark²²	DK	19.9	31.28	1994
Estonia	EE	7.1	17.6	1994
Finland	SF	18	29.5	1993	23
France	F	5.54	27.22	1992	9.2	19	1995
Germany	D	8.12	28.69	1993	10	16.7	1995
Greece	GR	3.33	5.6	1989	2.1	5.6	1995
Hungary	H	17	53	1994		14.1	1997
Iceland	IS	9.1	22.3	1994		22	1996
Ireland	IRL	4.9	13.8	1994	5.4		1994
Italy	I	7	13	1993	13.7		1995
Latvia	LV	12.45	24	1994		19	1997
Lithuania	LT	13.1	58.8	1993	10	35.2	1996
Luxembourg	L	9.92	32.3	1993	11.7		1994
Malta	M	0.337	0.629	1995		2	1996/7
Moldova	MOL
Netherlands	NL	13.3	23.1	1994	19.1	36.2	1994
Norway²³	N	18.9	60	1994	11	40
Poland	PLK	7	21.6	1994
Portugal	P	4.6	9.7	1993	3.7	12	1994
Romania	RO	3.5	16.9	1993
Russian Fed	SU
Saint-Marino	SM	0.11	0.19	1993
Slovakia	SL	4.79	11.78	1994
Slovenia	SV	4.4	10.1	1995		10	1995
Spain	E	4.87	12.17	1994	7.2		1995
Sweden	S	27.5	38	1994	28.7		1994
Switzerland	CH	10.8	27.9	1993
Ex rep of Macedonia	FYR					1.46	1995
Turkey	TR	2.41	12.3	1992	3.3		1996
Ukraine	UKR
United Kingdom	UK	11	27	1994	10	25	1994/5
Average		8.91	22.12

Country	Initials	Shared taxes	General Grants	Specific Grants	Other
Albania	AL	1	59	29	5
Austria	A	26	1	0	8
Belgium	B	0	25	5	10
Bulgaria	BG	34	37	7	0
Cyprus	CY	0	7	22	1
Croatia	CR
Czech Republic	CS	23	8	10	4
Denmark	DK	2	12	0	11
Estonia	EE	60	27	4	0
Finland	SF	1	28	1	0
France	F	0	24	0	2
Germany	D	17	15	13	0
Greece	GR	25	25	0	8
Hungary	H	7	52	5	2
Iceland	IS	43	7	1	2
Ireland	IRL	0	11	46	0
Italy	I	2	8	24	5
Latvia	LV	23	35	6	3
Lithuania	LT
Luxembourg	L	24	2	0	11
Malta	M	0	91	0	7
Moldova	MOL
Netherlands	NL	0	54	4	3
Norway	N	0	17	14	2
Poland	PL	23	22	15	0
Portugal	P	1	31	4	2
Romania	RO	33	25	21	0
Russian Fed	SU
Saint-Marino	SM	0	31	0	0
Slovakia	SL	30	1	8	0
Slovenia	SV
Spain	E	0	8	29	0
Sweden	S	0	11	8	0
Switzerland	CH	1	3	14	0
Ex rep of Macedonia	FYR
Turkey	TR	3	0	3	51
Ukraine	UKR
United Kingdom	UK	17	32	27	0
Average		12.77	22.87	10.32	4.42