Experts plead for a Law Local Finance that would enable the poor to improve their well-being, and the rich to develop. Economic Analysis

The Institute for Development and Social Initiatives IDIS Viitorul proposes a new version of the Local Public Finances Law and insists that it must be passed not later than July 2007, which will make it possible to render it operational starting January 1, 2008. On the other hand, Minister of Finance Mihai Pop, although supports the approval of the new law in July, says that actually it could come into force only at the beginning of 2009, as it is necessary to work out a series of normative acts in order to implement the law, as well as to train the civil servants according to the new legislative framework. The parties say that they already agreed at 95% on the provisions of the new law and it is planned to debate the disputed provisions soon. According to economic expert Veaceslav Ionita, the most disputed fact is that the central authorities do not support the idea of implementing the Law starting January 1, 2008. “We consider we have sufficiently postponed the approval of the Law during 17 years of independence, while the former soviet countries have carried out the reform of local public finances immediately after the collapse of the Soviet system”, Ionita says. According to him, there are no reasons for not having it passed in both readings in July, so that the mayoralties can approve the local budgets for 2008 according to the new provisions. The second disagreement is related to the way the finances are administrated. “We consider that the poor have to be helped to improve their well-being, and the rich to be allowed to develop further, while the Ministry of Finances proposes to take away the non-tax incomes from those who have them in order to give them to those who do not have money. It is ridiculous, because it is not normal to take away the money from a smart mayor who knows how to make them, and thus determining him to be smart no more”, the expert says. Ionita says that the experts plead for a law which would spur local development, and would ensure the poor a decent level of financing, while the aim of the MF is “to pack in such a way the present model, so the funds circulate as at present, but within a legal framework accepted by the Council of Europe, in order to avoid penalties”. According to the analysis by IDIS “Viitorul”, the present system of local finances is unbalanced and inefficient, functioning via the rule of exceptions and discretionary transfers. The present law on public finance (approved in 2003) had, according to the cited source, the strange merit to take away from the local authorities of first level (mayoralties) the most important income sources, excepting taxes. About MDL 100 mln are collected this way, of them MDL 65 in the municipalities of Chisinau and Balti alone. The rest of incomes transferred to the local budgets are the result of “informal” negotiations between mayoralties and raions. The local authorities of first degree in Moldova (896 mayoralties), which represent over 2.5 mln inhabitants, administrate only MDL 34 mln annually, which constitutes a volume 5-fold lower than the budget of the Customs Service of Moldova (MDL 183 mln) and only 0.3% of the Consolidated State Budget of MDL 12 bln. It is clear, the experts say, the priority of local development is insignificant under the conditions of the acting law as long as mayors administrate insignificant budgetary sources. [Government’s version is laughable] Officially, the local authorities of Moldova have about MDL 4.2 to use – the total sum of all local budgets of first and second degrees. Of this money, MDL 200 mln are special funds and financial means, and the local budgets are de facto administrating about MDL 4 bln. Of this sum, 55% are given to the budgets of the local councils and to the municipalities of Chisinau and Balti, and the rest are transferred for carrying out the tasks given by the state to the local authorities. In this way, those 900 mayoralties are responsible of administrating a sum of MDL 267 mln, of which 191 mln are used for maintaining their administrative staff. Thus, only MDL 76 mln remain for solving the most vital problems of the communities (roadways, sewerage system, water, heating, clean-up, construction of natural gas networks), which is not enough compared with the necessities. In light of this situation, the experts of IDIS “Viitorul” say that mayoralties should collect in the local budgets 70% of the tax on individual income, 100% of the tax on real estate. In the budget of the municipalities – the income tax, the tax on real estate and the private tax should be collected at 100%, plus 10% of the revenue resulted from TAV. In the raion budgets there should be collected 30% of the tax on individual income, 100% of the private income and 10% of TAV. To these funds there should be added means from general transfers, to the total sum of MDL 200 mln coming from the state budget, local non-tax incomes, local taxes, incomes resulted from the administration of local public properties, incomes from auctions and provided services, the road tax, tax on natural resources etc. The financing of MDL 200 mln for the local budgets should be allotted to a Financial Support Fund of Territories, to the total sum of MDL 400 mln, the rest of sum being collected from the rich local budgets for the financial support of the poorer budgets. In this situation, the local public authorities would collect and create by themselves the budgets which would amount to about MDL 4.8 bln, and the means collected for the state budget would reduce from MDL 12 bln at present to MDL 11.4 bln. Subsequently, the money from the state budget would be used for financing the national defence, education, public order, public services. The IDIS project suggests that the financing of the education should be taken over by the state budget, excepting the pre-school and extracurricular education, fact accepted by the central authorities. The optimistic scenario proposed by the IDIS experts is to ensure the raions with incomes in the shortest time possible, and the poor budgets to receive transfers and to be able to calculate them independently, to have non-fiscal incomes which would be used according to their decisions, which would stimulate them to increase the incomes, to have stability in order to be able to plan the annual income and the investment budget. This situation will allow them to become trustful actors on the capital market, to attract loans, to learn to administrate available resources, which would allow them to attract European funds for the local investments. Also, it is estimated that already within 2-3 years, the local authorities in Moldova will report significant increases in the own non-fiscal incomes. IDIS director executive Igor Munteanu says that if the problem of the local finances will not be settled as it was proposed by the experts, than Moldova might compromise the legislative initiatives which were passed in 2006: on administrative and local public decentralisation and other macroeconomic reforms which are to be passed. As long as Moldova lacks a new system of local finances, these laws will not considerably change the situation of the local authorities, which will reinforce the dependence of the mayoralties on the occasional subsidies, transferred on political criteria. Munteanu mentioned about the necessity of clearly and categorically separating the national budgeting; passing a new law and strengthening the financial autonomy. However, the experts ask themselves whether the Government will assume such a responsibility and if the international commitments are sufficiently clear for the central authorities of Moldova.