Local governments will have hard time passing budgets

There is no point to discuss the expenditure rule if it is to apply to local governements only - says Ryszard Grobelny, mayor of Poznan. (CC BY-SA Fryta 73)

The economic slowdown has inflamed the dispute between the Ministry of Finance (MF), which is responsible for the state budget, and local governments. Mutual accusations are the same: handing out deductions lavishly and in a discretionary way and looking for savings everywhere but in their own pockets.  Local governments warn that if this continues, hundreds of communities will have a problem with passing their budgets and financing a down payment for EU projects.

According to the MF data, after the first half of 2013, local governments recorded a surplus amounting to PLN 8 billion. At first sight it does not seem strange as most investments are settled at the end of the year and YOY statements regularly show that a lot is left after current expenses are deducted from revenues. In 2010 the surplus amounted to PLN 9,28 billion, in 2011 – to around PLN 11 billion, and in 2012  it rose to PLN 11,62 billion.

– It’s a paradox that the surplus in local governments results from the lack of money, says Andrzej Porawski, director in the Office of the Association of Polish Cities. – Most local governments have halted investment projects and are repaying loans taken  earlier.  Gathering available funds before the next EU financial framework is a less significant reason.

The halting of investments can be seen in the table under “Capital expenses”. In 2010 they amounted to PLN 44,24 billion, in 2011 – PLN 42,43 billion, and in 2012 – PLN 35,61 billion. The Association of Polish Cities estimates that in 2015 they may decline to PLN 19 billion. It may, of course, be explained by a transitional period between one and another multiannual EU budget, but this is only partly true. Local government officials repeat  like a mantra  that they would invest but they keep receiving new, costly tasks, while the revenues are going down.

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Infographics DG

The problem is older than the current economic slowdown and dates back to 2007. At that time, the Sejm passed amendments to the personal income tax law, which introduced the child tax relief. Beginning 1 January 2009, a two-tier tax scale became effective (18 per cent and 32 per cent instead of 19 per cent, 30 per cent and 40 per cent). Both amendments have led to a decline in personal income tax revenues, which are shared between the central government and local governments.

– The state has offset the loss by raising VAT, excise tax and disability pension contribution, while local governments have been unable to offset this shortage. We, the citizens, have been hit by these changes twice as strong: instead of a 22% VAT rate we have to pay 23%, a higher excise duty translates into higher cost of fuel in public transport and heating oil. Bearing in mind that we are the largest employer in Poland,  the cost of the increased disability pension contribution is not insignificant, either, says Porawski.

Since 2005, several laws have been adopted with a negative impact on community budgets. The Association of Polish Cities has counted that local governments have been losing PLN 8 billion a year as a result of the changes introduced in 2005-2011. And they want to recover at least part of the money.

A citizens’ bill amending the corporate income law of local governments is a way leading to achieving this purpose. It assumes an increase in local governments’ revenues from personal income tax, the introduction of an ecological subsidy for communities that have protected areas or areas of high environmental value, and re-enactment of the rule of offsetting shortages in local governments’ own revenues resulting from the adopted laws.

There should be a comeback of the rule that the parliament introduces new reliefs in local taxes only if they are financially compensated for, says Porawski. – This should be a kind of discipline for those MPs  who are eager to give away presents, particularly at somebody’s expense.

In March 2013, the government issued a negative opinion on the draft law.

Who gives up revenues

– The analysis of the consequences of statutory amendments in the past years does not confirm the fact that the changes in legal regulations have  led only to limiting local governments’ revenues.  Local governments ignore those regulations that increase their revenues, says the Press Office of the Ministry of Finance, and quotes examples, doing away with the  internet deduction and the child tax relief.

The Press Office also returns the argument that abolishing half of the deductions in property tax by the government will be conducive to saving PLN 3 billion (estimates of the Association of Polish Cities).

According to the Ministry of Finance, during an economic slowdown it is the local governments that should seek to increase effectiveness and efficiency of their own revenues. However, according to their reports, local governments grant tax reliefs and exemptions, reduce the ceilings of tax rates and thus renounce their revenues. In the last year only, the amount of PLN 4,4 billion was not paid to the budgets of communities and municipal counties. Compared to 2004, financial consequences of the decisions made by local government authorities in this respect increased by as much as 64 per cent.

Unnecessary easing

An extra circumstance  is the dispute over the expenditure rule. The one that will become effective from 1 January 2014 introduces a debt ratio individually for every local government entity. The public finance law makes it a requirement for the projected community budget current expenses not to be higher than the projected current revenues augmented by the budgetary surplus from previous years and available funds. This may be the reason why some of the local governments are now ‘boosting’ their ratios to be able to spend funds from the new EU financial framework in the future. This is not, however, disputed. The subject of the dispute is the easing of the new debt ratio proposed by the government.

– Work is now in progress to increase the possibilities to absorb EU funds by introducing relevant amendments to article 243 of the public finance law relating to the ratio. Some of the assumptions concern excluding interest on liabilities drawn to finance projects carried out with the participation of EU funds from the limit of debt repayment, as well as some exclusions concerning certain liabilities drawn to co-finance expenses, the Ministry of Finance has announced.

The debate about the expenditure rule itself –  relating to changing the rule in a way enabling local governments to draw more credits– does not make sense. It is asinine that first we are deprived of money and then we are told that we may become more indebted, Ryszard Grobelny, President of Poznań and President of the Association of Polish Cities at the same time, says straight from the shoulder. From 300 to 400 local governments will have a problem not only with balancing  this year’s budget but also with adopting next year’s budget – Grobelny warns.

He sums up by saying that: – in a while, local governments will be unable to carry out their own tasks, not to speak of gathering down payments for new EU projects, which will be needed after 2015. The 100 billion euro announced by Donald Tusk from the new financial framework may then remain just a beautiful dream.

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