Bosnia and Herzegovina is formed of two entities: the Federation of Bosnia and Herzegovina (FBiH) and the Republic of Srpska (RS). FBiH consists of ten cantons and 80 local self-government units (two cities and 78 municipalities), while RS consists of 62 municipalities. 

Legal acts governing fiscal decentralisation

The main legal act governing the fiscal relation in FBiH is the Law on Public Revenue Allocation (Law 22/09). In RS, the most important piece of legislation is the Law on Territorial Organization and Local Self-Government of 2004; the assignment of competencies over taxes, fees and charges is covered by the Law on the Budget System of the Republic of Srpska. 

Qualifying fiscal decentralisation

The most recent figures available for FBiH report that, in 2011, local governments’ revenues accounted for 10% of total public revenues and 4% of national GDP; both of these values are below the EU average (24% and 11%, respectively). In 2011, the composition of FbiH’s local government revenues was 36% own revenues, 30% from unconditional grants, 18% from shared taxes (notably the Personal Income Tax, PIT) and 16% from grants earmarked for the provision of specific services. Own revenues consist of administrative and communal fees and charges, fines and property tax income.

All VAT revenues, custom fees, excises and road fees flow into a single account managed at the federal level; resources from this account are shared between the federation (36%), the cantons (51%) and local governments (8%). In order to perform some fiscal equalisation, both the cantonal and local government shares are then allocated between the jurisdictions under their competence according to a formula based on population, area and, in the case of local governments, PIT per capita. Local expenditures in 2011 were composed of 29% on wages and benefits, 28% on capital investments, 23% on transfers to companies, and 19% on expenditures on goods and services.

Turning to RD, local government revenues in 2011 accounted for 14% of total public revenues and 7.4% of the national GDP. While these values are higher than for FbiH, they are still below the EU average. In 2011, the composition of RS local government revenues was 24% from own revenues, 50% from unconditional grants, 10% from shared taxes and 2% from conditional grants. A large majority of own revenues (88%) came from land development fees and impact taxes, with property taxes accounting for the remaining 12%. Local expenditures in 2011 these were made up of 30% on wages and benefits, 29% on capital investments, 23% on transfers to individuals, and 20% on expenditures on goods and services.  

Deficit, debt at sub-national levels and borrowing capacity

The law setting the rules for local borrowing in FBiH is the Law on Debt, Borrowing and Guarantees of 2010. Municipalities and cities can contract long-term debt if their debt service payment in a given year does not exceed 10% of the previous year’s revenues. In specific cases, municipalities and cities need permission from the Federal Ministry of Finance to borrow (for example, when the FBiH is the guarantor). In 2010, the debt of cities and municipalities accounted for only 3% of total FBiH debt, or 0.9% of GDP. Regarding RS, the only available data report that, in 2011, local government debt amounted to 3.9% of GDP (174 million euros).