OVERVIEW OF FISCAL DECENTRALISATION
The 2009 territorial administrative reform designed the Latvian government structure along a two-level basis: the central government and local governments (formed of nine cities and 110 municipalities).
Legal acts governing fiscal decentralisation
The main legal acts are the Law on Self-governments (1995), the Law on Equalisation of Self-Government Finances (1998) the Law on Stabilisation of Self-government Finances and the Monitoring of the Financial Activities of Self-governments (1999).
Qualifying fiscal decentralisation
Latvia is a relatively centralised country in which, in 2018, 75% of total government expenditures came from the central government (see the pie chart below). Local governments are not free to levy own taxes or to modify marginal rates on shared taxes. The main revenues of local governments are shared taxes (61% of total local revenues in 2016), earmarked government grants and subsidies (30%). Part of local government revenue also comes from resources transferred through the equalisation fund. Personal income tax is the main tax revenue for local governments. Real estate and land tax are fully local revenues, but no autonomy is allowed over setting rates and the tax base. Other shared taxes are those on gambling and on natural resources. Autonomy over expenditures is also limited, with most central grants earmarked to cover education and other public expenditures.
Source: authors’ elaboration on EUROSTAT data. For further details, see
methodology.
Fiscal equalisation mechanisms
Fiscal equalisation is carried out through the Local Government Finance Equalisation Fund (LGFEF), which performs the function of redistributing revenues from wealthier municipalities to poorer ones. The central government also contributes to this fund. Revenues are redistributed according to expenditure needs (calculated on demographic factors and other criteria); the basic principle is that municipalities contributing to the fund are those for which revenues from personal income tax and real estate tax exceed the expenditure need by more than 10%.
LEVEL OF FISCAL DECENTRALISATION
Revenue autonomy (own revenues relative to total resources available) at the local level is above the EU average (65% versus 53% in 2018), which entails a rate of dependency on central government transfers that is lower than the EU average (32% versus 48% in 2018). Local own revenues represented 17% of total government revenues in 2018, which is higher than the EU average (13%).
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.
The composite ratio, capturing aspects of fiscal decentralisation of both revenue and expenditure, suggests that the governmental structure in Lithuania has a degree of fiscal decentralisation (22% in 2018) that is higher than the EU average (16% in 2018).
Fiscal rules and borrowing capacity
Municipalities are allowed to borrow under very strict rules. State law imposes that annual debt-servicing by a local body should not exceed 20% of its local tax revenue. Each year, municipalities negotiate the limits of their aggregate borrowing and the issuing of guarantees with the central government. These limits are in the annual budget law. In case of intra-year financial difficulties, municipalities can underwrite short-term loans to be repaid within a year. Only larger municipalities enter into contracts with financial institutions, and the main lender to local governments remains the state treasury. The strict central government control over local borrowing manages to guarantee a sound fiscal position for most local governments that do not represent a threat to the fiscal targets of the central government.
Deficit and debt at sub-national levels
In 2018, the consolidated gross debt of the Latvian local government sector amounted to 5.5% of GDP, after declining smoothly over the last four years.
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.
EXPENDITURE BY GOVERNMENT LEVEL AND BY POLICY AREA
Local expenditures represent a significant share of total general government expenditures in the fields of housing and community amenities (96% of total expenditures in 2017), education (71% in 2017), and recreation, culture and religion (58% in 2017).
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.
Sub-national expenditures as a percentage of total local spending are higher than the EU averages in the fields of education (41% in 2017), housing and community amenities (10% in 2017), and recreation, culture and religion (10% in 2017). In all other areas of spending, expenditures are rather limited and below the EU averages.
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.
