OVERVIEW OF FISCAL DECENTRALISATION
The Albanian Constitution defines the two levels of sub-national governance in Albania: 12 regions and 373 local government units composed of 65 municipalities (urban areas) and 308 communes (rural areas).
Legal acts governing fiscal decentralisation
The Law 8652/2000 on the “Organisation and Functioning of the Local Government” (OFGL) sets the legislative framework for the devolution of responsibilities to the two tiers of sub-national governments in Albania. The multi-year decentralisation strategy (adopted in 2000 and revised in 2006) established a strong and powerful first level (municipalities and communes) and a coordinative role for the regions as an upper level of local government.
Qualifying fiscal decentralisation
In 2011, local governments' revenues accounted for 12% of total public revenues and 3.1% of Albanian GDP. Both of these values are below the European average.
The OFG Law states that local governments in Albania may obtain revenues from four basic sources: their own taxes (31% of total local revenues in 2011), conditional grants (44%), unconditional grants (25%) and borrowing (a very small fraction). Notably, in Albania tax-sharing between local and central government is very limited. Local governments’ own resources can be split into four components: in 2011, land development fees (impact taxes) were the largest component, accounting for 47% of resources, followed by communal fees (25%), assets revenues (16%) and property taxes (12%). In 2011, more than half (56.3%) of total local government expenditure was deployed to cover costs related to the provision of local public services (mostly wages and salaries of public administration employees). The second largest expenditure entry related to public transport (26%), followed by expenditure on primary and secondary education (6%), which is a competence shared with the central government. Expenditure on culture and water supply accounted for 4% and 3%, respectively.
Fiscal equalisation mechanisms
Fiscal equalisation across local government units is achieved through an unconditional grant from the state budget, which is weighted against the fiscal capacity of each local government unit. The fiscal capacity of each local unit is evaluated based on two major sources of own resources: small business taxes and vehicle registration taxes. Each municipality and commune with revenues per capita higher than the national average contributes 25% of the fiscal equalisation difference (this sum, adjusted by a population factor, is subtracted from the initial calculation of the grant). Conversely, each municipality and commune that is below the national average is compensated, through an increase in the unconditional grant, with 25% of this difference.
Deficit, debt at sub-national levels and borrowing capacity
Up to now, municipal borrowing has been very limited (local borrowing accounted for 0.2% of GDP in 2011). The Law on Local Borrowing was approved in 2008 with the intention of establishing a legal framework for the borrowing activities of local governments by removing the prohibition on local government borrowing. The idea of increasing the fiscal autonomy of local governments is a pillar of the Decentralisation Strategy, part of which consists in reducing the role of the central government in allocating resources to finance local governments’ capital investments and turning this function over to private capital markets. The Ministry of Finance remains entitled to issue sub-regulatory acts limiting or disapproving loan agreements of communes and municipalities in order to preserve the sustainability of public finances. Nevertheless, in addition to the centrally imposed limitations, the central government adheres to a policy of limiting total public debt to 60% of GDP. The extensive use of external and domestic debt at the central level is now approaching the 60% limit and further restricts the possible use of borrowing by the local governments within this overall policy of public debt limitation. In 2011, local government debt accounted for 1.5 million euros, or 0.02% of national GDP.
