CC BY
6Dema Dmytriy Candidate of Economic Sciences, Professor of Finance and Credit Department, Zhytomyr National University of Agriculture, Ukraine
Feshchenko Nataliya
Candidate of Economic Sciences, Associate Professor of Finance and Credit Department, Zhytomyr National University of Agriculture, Ukraine
METHODOLOGY OF DETERMINING FINANCIAL DECENTRALIZATION LEVEL
Summary: In this article it was researched by the authors the essence of fiscal decentralization, concentration and devolution. It was grounded the necessity of the numeric measurement of budget level decentralization and both its methods via including OECD of expenditure budget values, financial resources of municipal institutions and bodies of population self-organization, local and regional loans. It was offered to divide tax income according to the participation in budget levelling that maximizes the accuracy of determining fiscal autonomy level.
For determining level of financial decentralization, devolution and de-concentration two groups of indicators were introduced by the author: according to income and according to expenditures, each of them is subdivided into sub-indicators of the first and the second rank depending on the fact if they are taken into account while calculating inter budget transfers. It was offered the methodology of calculating the level of financial decentralization via relating income and expenditures grouped by indicators and sub-indicators of local and regional level to the total amount of consolidated income or consolidated disbursements expressed in percentage. It was proved that the level of financial devolution and the level of financial de-concentration are in total equal to the level of financial decentralization.
Key words: financial basis of local self-government, financial decentralization, devolution, de-concentration, financial autonomy level, integrated index of decentralization level.
Problem Setting. Current Ukrainian legislation creates financial basis of the local self-government, and the reform of decentralizing authorities is claimed to make this basis a powerful ground for forming local finance. However the list of financial resources that form the financial basis of the local level in Ukraine and expanding authorities of the local power bodies do not enable to state about the necessary level of decentralization and its effectiveness.
In the national science little attention is paid to the research of methodology for determining financial decentralization level. Financial and fiscal decentralization are substituted by the notions of financial security, financial independence and financial autonomy of administrative and territorial units, local budgets and territorial government bodies.
The latest research and Publications Analysis. Predominantly the foreign scientists pay attention to the notions of decentralization, they are the following: A.Downs, B.Hamilton, S. Homburg, R.Musgrave, H.Leibenstein, D.King, R.Fisher and others.
Only for the recent years this problem has been of great interest for the national scientists such as I.Volo-khova, O.Drozdovska, I.Lunina, O.Kyrylenko, A.Lu-chka, S.Slukhai, .Nekhaichuk, O.Cherniavskyi and others. Each of them has his own position and convictions as for the specificity of determining dece4ntralization level. A vast majority of the scientists assume that the level of financial autonomy of the local government bodies can be determined by the system of quantitative indexes; "specific gravity" of obligatory disbursements, "specific gravity" for providing delegated powers, "specific gravity" of own income, specific part of income from local taxes, duties and non-related subsi-
dies, and also the level of dependence from separate income sources and index of taxable capacity of the administrative and territorial unit [1,p.92].
At the same time there are some thoughts as for the necessity of ascertainment as for the level of independence in local government bodies in all the spheres of their financial activity: in questions of forming and spending local budget, extra budgetary funds of financial resources; organizing financial activity of municipal property subjects at the subordinate territories; local debt policy [2, p.68]. However, as usual, there is no methodology of similar calculations or it is substituted by the procedure of budget provision assessment.
The aim of the article - giving the overview of financial decentralization, devolution and de-concentration and working out the methodology of determining their levels.
Presentation of the main article stuff. Financial decentralization lies in expanding and strengthening rights and duties of local and regional self-government as for distribution and re-distribution of financial resources aimed at giving social benefits to the population.
Financial decentralization comprises financial deconcentration and financial devolution. Only the last notion is equal to financial autonomy and financial independence of local and regional self-government as it presupposes shifting tax liabilities to the bodies of local and regional self-government [3, p.66]. While financial de-concentration the central government transfers only a part of general state taxes, duties and obligatory payments to the territorial budgets in the form of fixed and regulating income.
According to the conclusions of the experts of the them as for determining tax basis, setting tax rates and
Organization of the Economic Cooperation and Development (OECD), the amount of tax income of the local budgets is not a quite objective assessment of the tax powers of the local authorities. The amount of such powers and, accordingly, the level of tax independence of the local authorities depends on the rights given to
giving tax privileges [4, p.9]. According to this fact the methodology determining fiscal autonomy and fiscal decentralization was introduced by the world community. The indicators of tax autonomy of OECD, introduced in Table 1, are located in order of diminishing its level.
Table 1
Indicators of OECD tax autonomy
Type of indicator Characteristics of indicator Subtype of indicator Powers of sub-central level
Indicator a Reflects exclusive powers to set tax rates and bases a1 Determines tax rates and other tax elements without the necessity of coordination with the higher government according to the level
a2 Establishes the norm and any other elements of the tax after its coordination with a higher level government
Indicator b Exclusive powers of establishing tax rates b1 Establishes a tax rate without limits
b2 Establishes a tax rate within upper and lower limits implemented by a higher level government
Indicator c Exclusive powers of determining tax bases c1 Determines only tax privileges
c2 Determines only tax loans
c3 Determines both tax privileges and tax loans
Indicator d Tax distributed by the agreement d1 Determines a split income
d2 Customs splitting can be changed only by the agreement of the sub-central government
d3 Customs splitting is determined legislatively, it can be changed by the higher level government, but not more than once a year
d4 Customs splitting is determined every year by the higher level government
Indicator e No powers to establish tax rates and tax bases e Other cases when the central government establishes the tax norm and basis
Indicator f No tax powers f No indicator valid
Indicators do not take into consideration which level of government collects the tax in fact, as it does not correspond to the notion of tax autonomy.
Indicators a-c bear evidence to tax powers of subcentral governments and accordingly about tax autonomy, and indicators e and f bear evidence about the absence of this autonomy.
The assessment of budget decentralization level does not presuppose the analysis of tax powers distribution and calculating the part of tax income according to the indicators of tax autonomy. OECD accounts for the necessity of researching disbursements powers. On this purpose it was implemented some indicators reflecting political ranging of rights for sub-central governments at the organization, regulation and financing provision of social benefits in quantitative amounts [5, p.78].
It is offered to get the data via quizzes for each political branch (expenditures direction). Coding is relatively simple. Each answer of the quiz was transformed into the low-level indicator via using the following codes:
for federal states: - central level - 0,
- regional - 3,
- local - 7,
- for social benefits providers - 10;
for unitary countries:
- central level - 0,
- local - 5,
- for social benefits providers - 10.
The lower the level to which some duties and tasks transferred, the more decentralized disbursement powers get and the higher value of indicator will be (it is easily transferred into per cent). The quiz is structured by five indicators of autonomy:
- political autonomy ( powers of sub-central governments as for determining the main policy and the main aspects of providing social benefits (existence or absence of liabilities of sub-central governments to provide some services);
- budget autonomy (powers of sub-central governments as for budget expenditures);
- ingoing autonomy (powers of sub-central governments for establishing incoming aspects of providing social benefits (determining the staff, establishing salary etc.);
- outgoing (effluent) autonomy (powers od subcentral governments to establish and control standards as for quality and quantity of services given (for example, the right to form school curriculum, the right to organize a hospital, the right to establish rates for local city transport etc.);
- monitoring and assessment (powers of sub-central governments to conduct assessment, monitoring and model testing (for example, financial control)).
The indicator's structure begins from low-level indicators describing one specific aspect of the autonomy. Using the technology of "accidental weight", low-level indicators form five horizontal indicators of autonomy shown above. Based on horizontal indicators a single high-level indicator is formed and it presents the right for disbursements in one sub-central political branch. The results for high-level indicator are expressed via arithmetic block of horizontal indicators, using the technology of accidental weight [6, p. 107].
The autonomy level of sub-national and local authorities in the debt policy sphere is estimated on the basis of analyzing the national legislation which determines the order of sub-national borrowings, the level and the mechanisms of central power control over borrowings of lower authorities and also quantitative parameters regulating the size of budget deficit, structure and amount of debt [7, p.130].
Thus, the tribute should be paid to the methodology introduced by OECD as for determining the level of budget decentralization (the parts of sub-central governments in income and expenditures of consolidated budgets and the part of inter-budget transfers in central budget income), but it also has some drawbacks.
First, OECD methodology allows determining only tax autonomy, unjustly paying no attention to the methodology of determining decentralization level as for non-tax income, income from operations with the capital, income from targeted funds that comprise local and regional budgets.
For the second, OECD methodology presupposes the opportunity of determining fiscal autonomy both by tax indicators and by transfer groups, that substantially complicates complex perception and general conclusions as for decentralization of budget income.
For the third, the methodology offered by OECD presupposes using objective indicators by income and subjective indicators by disbursements that makes impossible the connection of tax powers and disbursements powers.
For the forth, according to OECD methodology it is not presupposed to determine the level of financial decentralization (financial resources of municipal enterprises, self-organization bodies for the population are not taken onto account) and the level of budget devolution and budget de-concentration are not distinguished.
Therefore let us try to offer own, adapted to the national conditions methodology of determining financial decentralization, devolution and de-concentration. On this purpose two groups of indicators are introduced: for income (Revenues - R) and for disbursements (Expenses- E). Unlike OECD indicators, the national indicators are marked in Latin capital letters. For separating subtypes of indicators, Arabic numbers are added. Therefore, the number means division of indicators into subtypes of the first order, and small Latin letters mean subtypes of the second order.
The subtypes of the second order are introduced on purpose of dividing income and expenditures into groups depending on the fact whether they are taken into account while determining the amount of interbudget transfers.
Income indicators are marked in letters RA-RJ, where the first letter R means the income group of indicators (table 2). The indicators are located in descending order of income powers, descending stability level of set and regulating income, increasing the level of financial levelling in transfer from the objective criteria of providing inter-budget transfers to the subjective ones.
Indicators RA, RB and RC define the amount of tax liabilities both as to taxes and duties and to obligatory payments that is they describe powers of local and regional self- government bodies to make decisions as for incoming taxes and non-taxed income to their budgets.
Table 2
Income indicators of determining the level of financial decentralization, déconcentration and devolution
Indicator Characteristics of indicator Sub-indicator Powers of local and regional self-government bodies Income is calculated while determining interbudget tranfers
yes no
RA Tax powers as for determining tax rates and other tax elements (duty, obligatory payment) RA1 Set by themselves tax rates and other tax elements RAla RA 1b
RA2 Set by themselves tax rates in terms set by the central power, and other tax elements without limitations RA2a RA2b
RA3 Set by themselves tax rates without limitations and other tax elements in terms set by the central power RA3a RA3b
RA4 Set by themselves tax rates and other tax elements in terms set by the central power RA3a RA3b
RB Tax powers as for determining tax rates RB1 Set by themselves tax rates without limitations RBla RBlb
RB2 Set by themselves tax rates in terms set by the central power RB2a RB2b
RC Tax powers as for determining other tax elements (duty, obligatory payment) except rates RC1 Set by themselves a basis for tax calculation and set privileges RC1a RC1b
RC2 Set by themselves a basis for tax calculation RC2a RC2b
RC3 Set privileges by themselves RC3a RC3b
RD Income from municipal property, income from municipal enterprises ( except assets received from the budget) RD1 Income of the territorial budget received according to the norms set with the appropriate bodies of local and regional self-government bodies RD1a RD1b
RD2 Territorial budget income received according to the norms set by the state RD2a RD2b
RD3 Municipal enterprises income received according to the norms established by the appropriate bodies of local and regional self-government RD3a RD3b
RD4 Municipal enterprises income received according to the norms set by the state power RD4a RD4b
RE Income of the population self-organization bodies (except budget funds) X X X X
RF Loans RF1 Set the order of loans and debt structure independently X X
RF2 Set the order of loans independently X X
RF3 Set debt structure independently X X
RF4 No powers X X
RG Set taxes, duties and obligatory payments of the central government which give no tax powers to local and regional self-government bodies RG1 Taxes, duties and obligatory payments set for indefinite term RG1a RG1b
RG2 Taxes, duties and obligatory payments set for indefinite term RG2a RG2b
RG3 Taxes, duties and obligatory payments set for a year RG3a RG3b
RH Tax splitting RH1 Tax splitting can be changed only in accordance to the proper body of local or regional self-government RH1a RH1b
RH2 Tax splitting is determined by legislation (state power) once a year RH2a RH2b
RH3 Tax splitting is determined by legislation (state power) and can be changed within a year for several times RH3a RH3b
RI General direct inter-budget transfers RI1 Following regression principle while financial levelling by the objective formula methodology X X
RI2 Inter-budget transfers level tax potentials of territories to one level by objective formula methodology X X
RI3 Inter-budget transfers level the income of territories to one level by objective formula methodology X X
RI4 Provided subjectively by the central government X X
RJ Aimed direct inter-budget transfers RJ1 Provided by objective criteria X X
RJ2 Provided subjectively X X
Indicator RD describes income from municipal property and municipal enterprises income which was achieved not for account of budget funds (in order to remove double account)
According to the current legislation of the country own income of budget institutions are added to budget funds as non-tax income. Therefore while calculating financial decentralization level own revenues of budget establishments will be reflected not by sub-indicators RD3 or RD4, but according to sub-indicators RD1 or RD2 depending on the subject establishing income norms.
Indicator RE is aimed for accounting in a separate group of income of population self-organization bodies. This income comprises income received from juridical persons, citizens of the territorial community and from other sources except budget funds. Budget resources given out to the bodies of population self-organization are excluded from this group on purpose to remove double accounting.
Indicator RF is implemented to define the autonomy level while taking loans to the territorial budgets. Usually boundary debt amount of local and regional self-government is set by the state power. According to these limits deficits of local and regional budgets are established.
Disbursement indicators of determining level of fir
State power may give powers to the local and regional self-government only as for debt structure and the order of taking loans.
Disbursement indicators are marked by letters EA-EG, where the first letter marks disbursement group of indicators (Table 3).
Indicators describing expenditures of local and regional self-government are located in order of decreasing tax powers: from disbursements for executing non-obligatory own powers to disbursements for executing delegated powers.
Disbursements of the territorial budgets are divided by indicators and sub-indicators according to the amount of disbursements powers and the necessity of fulfilling own and delegated functions.
According to the amount of disbursement powers, disbursements of municipal enterprises and financial establishments by indicators and sub-indicators. At the same time their disbursements on account of budget funds are not taken into consideration on purpose of removing double account. Funds, gained as the result of loans, are distributed by disbursements indicators depending on directions of their usage.
Table 3
ial decentralization, déconcentration and devolu-
Indicator Indicator characteristics Sub-indicator Powers of local and regional self-government bodies Disbursements are calculated while determining interbudget transfers
yes no
EA Disbursements for fulfilling own non-obligatory powers by local and regional self-government bodies EA1 Sets independently tax norms, standards and ways of providing social benefits EA1a EA1b
EA2 Sets independently only disbursement norms and standards EA2a EA2b
EA3 Sets independently only ways of providing social benefits EA3a EA3b
EA4 State power establishes disbursements norms, standards and also ways of providing social benefits EA4a EA4b
EB Disbursements for fulfilling own obligatory EB1 Sets independently tax norms, standards and also ways of providing social benefits EB1a EB1b
powers by state and local self-government bodies EB2 Sets independently only disbursements norms and standards EB2a EB2b
EB3 Sets independently only ways of providing social benefits EB3a EB3b
EB4 State power establishes disbursements norms, standards and also ways of providing social benefits EB4a EB4b
EC Disbursements of population self-organization bodies (without accounting budget funds) X X X X
ED Expenses of municipal enterprises and financial establishments (except expenses gained from the budget) ED1 Sets independently disbursement norms, standards and also ways of providing benefits ED1a ED1b
ED2 Sets independently only disbursement norms and standards ED2a ED2b
ED3 Sets independently only ways of providing benefits ED3a ED3b
ED4 State power establishes disbursement norms, standards and also ways of providing benefits ED4a ED4b
EF Disbursements for loan and interest repayments EF1 Set independently the order of loans and debt structure X X
EF2 Set independently the order of loans X X
EF3 Set independently debt structure X EB3b
EF4 No powers X X
EG Disbursements for fulfilling delegated powers by local and regional self-government bodies EG Disbursements norms, standards and ways of providing social benefits are established by state power ED1 ED2
In order to determine the level of devolution, deconcentration and decentralisation is necessary to group the income of local and regional self-government bodies by indicators and sub-indicators. Absolute data gained according to indicators and sub-indicators can be correlated to the general amount of consolidated income (state income and regional and local self-government) or consolidated disbursements (state disbursements and local and regional self-government disbursements) of the state and multiply by 100 per cent (Drawing 1).
The sum of calculated quotients according to all revenue and disbursements indicators will be the level of decentralizing financial resources expressed in percent to the general amount of income and expenditures of the state consequently.
The sum of quotients by income sub-indicators RA1b, RA2b, RA3b, RA4b, RB1b, RB2b, RC1b, RC2b, RC3b, RD1b, RD3, RF1, RF2, RF3 and by indi-
cator RE in terms of the sum of quotients by disbursements sub-indicators EA1b, EA2b, EA3b, EB1b, EB2b, EB3b, ED1, ED2, ED3, EF1, EF2, EF3 and by indicator EC defines the level of financial devolution.
Thus, the level of financial devolution takes into account the part of local and regional self-government revenue gained on the basis of own decisions and which do not participate in determining the amounts of interbudget transfers and are used for fulfilling own powers in case of setting disbursement norms and standards as for providing social benefits on their own.
The level of financial devolution and deconcentration is equal in total to the level of financial decentralization. The methodology of determining the level of financial decentralization allows appropriate determining the levels of budget and fiscal decentralization and defining the levels of budget or fiscal decentralization, devolution and deconcentration.
FINANCIAL DECENTRALIZATION
THE LEVEL DEFINED AS : Max
X RAI a, RA2a, RA3a, RA3a, RB1a, RB2a, RC1a, RC2a, RC3a, RD1a, RD2, RD4, RF4, RG, RH, RI, RJ, related to consolidated revenue of the state or
X EA1a, EA2a, EA3a, EA4, EB1a, EB2a, EB3a, EB4, ED4, EF4, EG, related to consolidated disbursements of the state
FINANCIAL DECONCENTRATION
THE LEVEL DEFINED AS: X RA1b, RA2b, RA3b, RA4b, RB1b, RB2b, RC1b, RC2b, RC3b, RD1b, RD3, RF1, RF2, RF3, RE, related to consolidated income of the state
by Lim X EA1b, EA2b, EA3b, EB1b, EB2b, EB3b, EC, ED1, ED2, ED3, EF1, EF2, EF3, related to consolidated expenditures of the state
FINANCIAL DEVOLUTION
THE LEVEL DEFINED AS:
X RA1b, RA2b, RA3b, RA4b, RB1b, RB2b, RC1b, RC2b, RC3b, RD1b, RD3, RF1, RF2, RF3, RE In terms of
X EA1b, EA2b, EA3b, EB1b, EB2b, EB3b, ED1, ED2, ED3, EF1, EF2,
Drawing 1. Methodology of determining financial decentralization, déconcentration and devolution
The level of budget devolution is located by analogy to the level of financial devolution except sub-indicator RD3 and indicator RE.
The level of budget deconcentration is calculated as financial deconcentration decreased to sub-indicator RD4.
The sum of quotients in budget devolution and budget deconcentration levels determines the level of budget or fiscal decentralization. It can be also defined via decreasing the quotient of financial decentralization
to quotients of sub-indicators RD3, RD4 and indicator RE.
Conclusions and perspectives as for the following research. Calculating the level of financial decentralization is not limited only by the analysis of distributing tax powers and calculating the quotient of tax income by tax autonomy indicators. It was also proved the necessity of researching disbursement powers, inter-budget transfers, municipal enterprises resources and debt liabilities of local and regional levels.
The methodology of determining the level of financial decentralization offered in the article forms the basis for further more thorough applied working-out connected with the necessity of extending financial decentralization in Ukraine, completing some legislation norms that will create background for further system reformation of local finance of Ukraine on purpose to reach the effective financial activity of local self-government bodies.
The list of used sources:
1. Budget and Budget Process under Conditions of Transit Economics of Ukraine [Text]: Monograph/ edited by K.V.Pavliuk. - K.: NDFI. - 2006. - 584 p.
2. I.S.Volokhova. Function of Territorial Finance under Decentralization Conditions [Text]/ I.S.Volokhova// Science at Information Space: Materials of the VII International Scientific and Practical Conference on 4-5 October 2012; in 7 B. - Dnipropetrovsk: K.O.Bila, 2012. - pp.67-70
3. V.I.Baretskyi. Strengthening Financial Autonomy of the Local Power and Self-Government [Text] / V.I.Batretsky // Finance of Ukraine. - 2005. - 31. - pp. 65-69.
4. S.Bach , H. Blochliger, D.Wallau. The spending Power of Subcentral Governments [Text] : a pilot study / S. Bach, H. Blochliger, D. Wallau // OECD Network on Fiscal Relations Across Levels of Government. -OECD, Paris. - 2009. - №8. - 20 p.
5. Musgrave R.A., Musgrave P.B. Public Finance in Theory and Practice [Text] / R.A. Musgrave, P.B. Musgrave. - 4-th ed. - New-York: McGraw-Hill, 1984. - 824 p.
6. Volokhova Irina. Methodology of Determining Degree of Financial Decentralization on Profits [Text] / Irina Volokhova // European Applied Sciences. №1/2 /Stuttgart: 2013. - P. 106-110.
7. A.Cherniavskyi, K.Varapetov. Budget Decen-traliztion in the Countries with Transit Economics [Text]/ A.Cherniavskyi, K.Varapetov// Economics Questions. - 2004. - №11. - pp.126-141.
