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Is there any budgetary effect of economic crisis at the local

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Is there any budgetary effect of economic crisis at the local ...

    Is there any budgetary effect of economic crisis at the local level in Slovenia? (draft full version will be uploaded in until April 12th)

    Uroš Pinterič

    Economic crisis caused different reactions in different states in the private as well as public sector. Public sector generally implements one of two possibilities. They increased public spending and digging hole into budget in order to keep higher demand. Or they declare crisis and started saving public money. In both cases effects were only partial. However, main characteristic in both cases is that any change was only incremental due to fear that their measures might worsen the situation.

    Under such circumstances also municipalities took different activities in order to overcome decrease of revenues. Due to the fact we will analyse different types of Slovenian municipalities in following aspects: In what extend economic crisis influenced revenues of municipalities and if and how municipalities responded to lack of usual revenues (by increasing the project financing, by asking for state support, by savings) and if by saving, in which areas savings took place human resources, social transfers or investment and

    development projects.

    Main expectation is that there will be no substantial change in the area of reforming municipal administration in order to make it more effective. Instead of this we expect reducing the money for civil society organisation, education, social transfers and economy (more or less in this order) while there will be no significant change in municipal expenses (not for salaries and not for material expenses).

    If this will be proven true, one can assume that economic crisis in Slovenian case of local government was more appropriate excuse for reducing money for certain social activities and not for reforming local administration in the way to provide services to the citizens more effectively.

INTRODUCTION

    Since 2008 world is facing situation called economic crisis. Since 2001 world is facing war on terrorism. But world is facing social crisis for decades. In this article we argue that world is in complicated socioeconomic and political situation. But we will not search for economic or political reasons for the situation; despite we will systematically use both scientific languages. We will try to show more or less systematically that the main reasons for majority of the problems we have today lies in society and its development. We will use even scientifically incorrect language and arguments and we will try to validate them. For this one can be accused of lack of scientific attitude and knowledge but in this paper major position is that even scientists at their work usually use or at least support their ideas with their own value systems including high moral standards as well as most common prejudices (even those banned by constitution). This argument is especially valid for social scientists but we usually refuse it due to inappropriate consequences for us. As well as we are refusing to see deeper reasons for instability of contemporary world, which lead to imperfect and partial solutions. Our hypothesis is that main reason for instability of the world is mainly individualization of globalized world, common ignorance of mass and elite and disrespect for those values that are

    proclaimed as important. Our argument is supported by pessimist approach, taking negative stance towards any occurrence or more commonly, we are standing on Murphy law that if there is anything that can go wrong it will go wrong for sure.

ECONOMIC CRISIS

    Economic crisis seems to be most frequent phrase in 2008/09. Brake down of world economy started in mid-2008 officially. However, in August 2007, newly appointed Governor of Bank of Slovenia at meeting of European Central Bank make comment on economic situation that was strongly criticised in European and Slovenian national monetary space. He said that ?if

    there will be stronger turbulence they can cause negatively on demand of households?. The statement was in the context of American mortgage crisis and its effect in EU economic space. His comment was diplomatically marked as inappropriate (as also some others further on), but it was academic warning from political person that should not happen. However, he just warned that what is going on can have global consequences for economy. However he just warned from one thing that was best presented by late US stand up comedian George Carlin who well defined the main problem of economic crisis that emerged. People are spending ?Money they don't have on things that they don't need?. He only forgot to add that they will probably not be able to pay for a life-time. Any economic situation can be explained generally in two different ways. First there is Smiths' invisible hand of market balancing the market to achieve moments of optimal ratio between supply and demand. Second, opposite pole is system of state intervention in market economy, generally to prevent few important market failures, such as negative exteralies, providing so called public goods where private economy is not interested or it can ride on natural or created monopoly where demand is irrelevant and consequently service is not provided adequately or prices are not optimized by market. However, politics/government is strongly connected to the economy or private ?players? who hold important positions and can provide economic support to the different political ?players?. Over the time this led to strong bonds between economy and politics, causing lobbying, corruption and clientelism. In this condition natural monopoles are generally outsourced to private sector after initial investment. In this sense state finances private monopoly or oligopoly by outsourcing service to one or few private companies who can realise high or medium high profits with more or less no entrance costs and all additional cost are generally paid by final consumer. Under such circumstances it is hard to belive that market economy as well as state driven economy can work separately or together without serious failures.

POLITICAL CRISIS

    If economic crisis is usually only temporary and occurs when economic, monetary, fiscal and labour policies are not able to absorb all market and controlled economy dysfunctions and it usually persists when all involved parties start new circle of economic growth. On contrary, political crisis is much deeper and mostly connected to the values of political elite and their ththrespect for them. Revival of Athens’ democracy in 16-17 century that was enhanced in 19 thcentury and fully developed in mid-20 century into modern representative multi-party

    democratic political system as desired model of political system brought back specific value 1system that was neglected by ancient and medieval monarchies. These values can be simply

     1 In a sense of single ruler with ultimate discretion on all state issues.

    declared as democracy, but they can be in the manner of classical definition developed in rule by the people (that can be direct or indirect), when those in charge can be changed if they are not fulfilling the will of people. However representative democracy that was introduced due to economic and population reason (all citizens cannot be paid for political activity but they still need money to live, and it is impossible that majority of population will take political decision on regular basis when number of citizens is high) minimized the influence of general population by declaring themselves representatives

SOCIAL OR SOCIETAL CRISIS?

    Social crisis is strongly connected to the economical one and certainly also to political one due to the fact that state is less and less able to block different hazards (or it is even not interested to do so). However, next to the social crisis, which is more or less question of welfare we will address in this part also part that can be proven as answer to different abovementioned types of crisis. We will pay attention to societal crisis.

    Societal crisis can be defined as reason and consequence of general social situation including also economic and political dimension. This non-illusive down oriented infinite spiral of human devolution can be hardly stopped and demands serious political cut that would be comparable to enlightened absolutist rulers, allowing that ratio and humanity evolve again. Due to this reason and cyclic form of relation between conditions and consequences of societal crisis it is hard to define appropriate order. But according to Hobbes definition of 2state of nature people age greedy and selfish one can probably start from this point. In

    general we all want comfort life for us (if somebody is getting his comfort by sleeping drunk at the street it is equally searching for own comfort like one sleeping on hundreds of pillows 3in one of bedrooms in the castle). However, state of the nature is sleeping on bare ground and deprived housing. Despite in Middle Ages commodity exchange payment was still and option money more and more became source of exchange value that became due its growing universality payment value that signed artificial values (prices) to different commodities and unify exchange rates for different values. This caused specialization and need for money in order to get other commodities. If it was impossible to exchange pig for knife even that both subjects of interest were worthy same amount of money, one should sell pig first for money to buy the knife for same amount of money. At the moment we will leave story with government tax interference aside. And people realized in short time (in fact long before middle ages and general reintroduction of money after antic civilizations) that more money means better life (especially in the cities). And here we can say that general population re-discovered greed, and for they were prepared to do many different things in order to get (more) money, from long day work, financial speculations and robbing (which necessary assume also killing of fellow human). Industrial age enabled those with historically better life positions (noble family, long time family saving) to open business and produce things that are generally needed, first on their own and latter on with hired overworking and underpaid labour force composed of those who were ready to work in factory, had no other option or who wanted extra money. Here we have basics of capitalism. And due to abovementioned greed sure factory owners wanted more than they had before (as well as workers). And they did get more (workers in general did not), and they were able to develop more and to get even more (to the

     2 Which can suite to more scientifically proven statement that people are self-important and more and more individualistic. 3 Where we understand that castle option is more widely accepted in all societies than sleeping on bare ground.

    level of equilibrium between demand and supply). However, taking care of seek works was far from their priorities. Family and society tried to take care of it.

    At this point we should (despite we are aware that thing was going on much longer) introduce the state, who found out that they can get more taxes needed for army if workers and manufacturers are getting higher standards which can be achieved if manufacture is more developed and workers are more healthy and skilled. Industrial age turned into modern post-industrial age with highly skilled workforce and developed production processes, with shorter workdays etc. If we remember desire for more form previous paragraph we can see that when supply was in equilibrium with demand invisible hand of market should stop or stabilise production of supplies at that level. But owners, directors, managers wanted more (also workers wanted more but they did not hold key power positions). And in order to increase profits supply side invented marketing to create artificial demand and to sell additional more and more diversified products. And they succeed by creating consumption society spending “money it doesn’t have on things it doesn’t need”. And if we remember greed – it means

    competition in time perspective (more than before) and in comparative perspective (more than another person), competitiveness is Hobbes state of nature (brute) and it means nobody really cares about others more than necessary if it does not bring additional benefits and privileges of caring person. And sometimes care for other has positive effects not only for beneficiary but also for one who is supportive. It is in a sense of gaining reputation or moral praise from others (see Maslow hierarchy of values). However, if such help is not systematic it will fail in situation of mass crisis due to the fact that anyone will firstly try to solve own situation. However, things can be relatively (from the global perspective) manageable as long as world is not too globalized, because crisis will usually not take effects simultaneously at different places. Globalized world brings almost immediate effects around the world. Due to the fact that in 24 hours information or person can reach any populated place on the earth effects of crisis can be almost immediate and deploying one infected person with agents spread with unnormal speed and 99% dead rate within 10 hours and with no clinical signs before death we can be sure that majority of population will be infected before easily and sustainably among humans

Economic crisis between budgetary revenues and expenses

    As we mentioned in introductionary discussion, there economic crisis is only most visible, or better, shocking part of social development recession that changes general level of prosperity in undesirable way. When everybody can feel consequences of economic crisis, financial instability is much less visible in budgetary terms. However, less money in economy and households means as well less money for the state, regional and local budgets and consequently it demands rationalization of public services or even abolishment or privatization of certain services. In states with up-to-date public administration, that is able to overcome risks of contemporary world complexity it is much easier to manage budgetary crisis than outdated bureaucratic public administration that is procedure-oriented instead goal-oriented. Budgetary crisis as the consequence of economic crisis is much more intense in those states with high level of taxation. And negative effect can be multiplied in the case of ineffective public administration that is not able to search for internal reserves in resources. One can assume that same situation can be applied at local level as well.

    Slovenian local finances general legal frame

    Slovenian municipalities are funded from several different sources, where the legislation also defines the targeted use of funds according to the source of income. Basic legal acts governing the financing of Slovenian municipalities are the Local Self-Government Act (LSGA), and Financing of Municipalities Act (FMA) and their amendments, the Act Amending Local Government Act (LSGA-A) and the Act amending the Act on Local Finances (FMA-A) Of course there were several different supplements and even more so, at this point we only refer to those most important for present issue at hand (see also Milunovič, 2005: 108-112).

    FMA in the article 2 notes, that revenues from taxes and other duties specified by the LSGA and revenue from taxes, charges, fees and other charges specified by special laws, belong to municipalities. In the LSGA financing of municipalities is regulated in the sixth chapter, where Article 51 stipulates that the assets of municipalities are composed of mobile and immobile property owned by municipalities, financial capital and property rights. Stipulation in the second paragraph of that article, which says the municipality needs to managed it’s assets as a good manager," is very important. This relatively worn out phrase can often present a stumbling stone of municipal financing and political struggle among municipal positions and oppositions. This was particularly apparent in some cases of the real estate trafficking in City Municipality (CM) of Ljubljana (MOL), where there was very loud criticism from the opposition in city council; pointing to the notion the MOL managed its assets in conflict with paragraph two of the Article 51 of the LSGA.

    On the basis of Article 52 of the LSGA the municipality finances local matters of public interest from their own resources, funds from the state budget and borrowings. Their own resources are taxes and other fees and income from municipal property (See Milunovič, 2005: 112-114). State is obliged to provide a financial offset in the amount that public spending per capita of any municipality reaches an average of at least 90% of average consumption per capita in the municipalities of the Republic of Slovenia. This means that the state is obliged to provide the difference in financial capacity to the extent that in any of the municipalities (municipal) public spending per individual would not deviate downward by more than 10% of the average public spending per individual in all Slovenian municipalities. Financing of the local affairs of public importance is provided on the basis of Article 53 of the FMA from the following:

    1. Property tax

    2. Inheritance and gift tax

    3. Gambling tax

    4. Real property transaction act

    5. Other taxes provided by law

    At the same time, the municipality, under the same article FMA, also receives part of the revenue from personal income tax, which is determined by a special act of the National Assembly of the Republic of Slovenia.

    Article 54 of the FMA stipulates following income from the assets of municipalities: 1. Income from renting and leasing of land and buildings, which are communal property 2. Income from equity investments

    3. Income from securities and other property rights the municipality bought 4. Income from annuities, profits of public enterprises and concessions

    According to the Article 55 of the FMA, the municipality may borrow money if it meets certain preconditions defined by law.

    Article 56 of the FMA stipulates that the state is obliged to provide additional funds to the municipality for it to:

    - Carry out urgent tasks of the municipality

    - Finance the tasks, the state transfers to be managed by the municipality

    - Co-finance local affairs of public interest, when it has a special interest in their development - Offset by investing, in accordance with the program in municipalities, with the lowest communal standards.

    In a given financial period, taking into account the as equal regional development as possible, the national budget assigns the funds for the implementation of local affairs of public interest according to the third indent of Article 56 of the FMA, taking into account the criteria for determining the amount of funds. Said criteria are in particular, number of residents and population of the municipality, geographic characteristics and status of municipalities in terms of specific interests of the state for its development.

    Municipality is required to define its revenue and expenditure for the next budgetary year, which is equal to the budgetary year of the state, in the municipal budget. According to the budget in the next year, the municipality may only use the revenue received by the end of the previous year. For all unforeseen expenses in the current year it is necessary to obtain the consent of the Municipal Council. If the municipality budget for next year is not accepted by the end of previous budgetary year, the municipality is temporarily funded by a system of 'twelfths' on the basis of the budget from the previous year, until a new budget is adopted. In the event that the Municipal Council has not adopted its budget for the subsequent two years the Parliament of the Republic of Slovenia may dissolve the municipal council and call for preliminary elections. According to the Article 59 of the FMA, the Court of Audit of Republic of Slovenia, and in certain parts Ministry of finances, supervise the municipal spending. Details of the design and implementation of the municipal budget are regulated by the FMA and FMA-A.

    Municipal financing takes place in several parts and is covered by various resources specified in advance. To that end, the Article 20 of the FMA stipulates that the cost of urgent tasks in the municipality (guaranteed expenditure)are funds for the work of municipal authorities and municipal administration and the funds for carrying out activities in the field of basic education, research activities, culture, sports, social welfare, health care and other activities, funds for the implementation of special rights of ethnic communities, subsidies and current transfers to public utilities (municipal cleansing service, housing activity, road construction and repair, management of the environment, environmental protection and other activities), funds for fire protection and for protection against natural and other disasters and the funds for mortician service. The amount of funds for aforementioned activities is determined on a yearly basis by the Ministry of Finance. Amount is based on the criteria established in the conjunction with other competent ministries and municipalities for each budgetary year. The Article 9 of the FMA-A amends and simplifies the article 20 of the FMA in the sense that "the

    funds used by the municipality to be able to ensure the implementation of constitutional and legal tasks are considered to be an appropriate scope for funding of local affairs of public interest (hereinafter referred to as appropriate consumption)." Appropriate consumption per capita (which is the average amount of funds per capita of the Republic of Slovenia) on the basis of FMA-A is determined by the Parliament when adopting the state budget for each current year. Based on the Article 21 of the FMA, the funds to finance the so-called guaranteed expenditure drawn from the inheritance and gifts tax, gaming tax, real property transaction tax, administrative fees, a special tax on the use of gambling machines outside of casinos in the amount specified by individual law that introduces specific tax. However, on the same basis and in the amount determined by the FMA, the municipalities are also provided with part of the tax revenue from personal income tax to finance the so-called guaranteed expenditure. With the introduction of appropriate consumption and the elimination of the term guaranteed expenditure the uncertainty regarding any other tasks, that should be, on the basis of the FMA, provided by the municipalities and be financed by other sources. The FMA, in Article 20, therefore specifies all tasks that shall be financed from the guaranteed expenditure. FMA and FMA-A state that among miscellaneous revenue for the funding of the municipality tasks include: property tax, the compensation for the use of building land, local tourist taxes, utility and other fees, damages for the conversion of agricultural land and forest, damages and compensations for the degradation and pollution of the environment, administration revenue and revenues specified by other acts in the amount specified by individual act, establishing every single revenue. However, the third paragraph of the Article 22 FMA enables municipalities to prescribe, property tax that is up to five times greater than the amount determined by law.

    The most important source of tax revenue for the municipalities is part of the personal income tax, that is currently 54%. The share allocated between the municipalities depends on the ratio between measured personal income tax of all taxpayers living in the municipality and the measured personal income tax for all taxpayers living in the whole country in the year before last. The mentioned ratio is determined on the basis of Article 23 of the FMA by the Ministry of Finance.

    FMA provides, in the section on the tax recipient, that an individual tax (inheritance and gift tax, gambling tax, real estate tax, income tax from buildings and spaces for rest and recreation, tax on floating objects, tax on the use of gambling machines outside casinos) is primary municipal revenue of municipality in which the property is located or where the person resides, and additionally provides certain modifications (see Article 30-34 FMA), where territorially principle cannot be applied. Such allocation of taxes is understandable, but on the other hand, it greatly determines the amount of the individual municipalities’ income. We can thereby assume that some, especially smaller and less developed municipalities are being greatly disadvantaged for a relatively large proportion of revenues, regardless of the fact that they must implement certain task of the same quality as larger municipalities with more revenues. Such loss of revenues is preventing their further development and is hindering their financial autonomy in terms of increased dependence on financial balance transfers from state. Additional funding, provided by the Slovenia legislation on the financing of municipalities, is the borrowing of funds, which is intended only to finance investment and is particularly precisely defined. Borrowing is also only allowed for the financing investments approved by the municipal council, whereby the assignment must be approved by the Ministry of Finances. The municipality should not be indebted for more than 10% of revenue realized in the

    previous year and the repayment of principal and interest will not exceed 5% of the revenue realized in current year. More extensive borrowing is exceptionally possible to finance housing construction, water supply, sewage treatment; but only if the repayment of the principal does not exceed 3% of revenue realized last year (Milunovič, 2005: 116). The municipality may not borrow abroad, the only exception being the borrowing on the basis of a special law, the borrowing with the guarantee of the municipality and borrowing by public companies and public institutions, whose co-founder is the municipality (the latter three options are considered within the scope of allowable borrowing of the municipalities for each year). Such strictness in the law is the result of over-indebtedness of municipalities in the early nineties of the last century, when a small number of municipalities excessively borrowed money also for the funding of non essential projects (Čok et al., 2003: 10; FMA:

    Article 15-19; FMA - A: Article 5-8). Milunovič (2005: 116-117) notes that the debt of

    municipalities is increasing and in 2003 it amounted to 18.4 SIT billion.

Indicators of economic crisis in local budgets in practice

References

    Čok, Mitja; Prevolnik Rupel, Valentina; Stanovnik, Tine; Cirman, Andreja (2003): Javne finance v Sloveniji. Ljubljana: Ekonomska fakulteta.

    Fakulteta za upravo: Razvoj dejavnikov uspešnosti proračuna občine.

    Dostopno preko: http://www.fu.uni-lj.si/sib/vhod.asp (24.8.2005)

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    Milunovič, Vilma (2005): Problematika financiranja občin. V Marijan Brezovšek in Miro

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    Stanovnik, Tine (2004): Javne finance. Ljubljana: Ekonomska fakulteta.

    Vlaj, Stane (1998): Lokalna samouprava: občine in pokrajine. Ljubljana: FDV.

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