OVERVIEW OF FISCAL DECENTRALISATION
The Estonian governmental structure has two levels: the central government and 215 local governmental units.
Legal acts governing fiscal decentralisation
The basic legal provisions regarding the status and the organisation of local governments are set by the Constitution. The major legal act in this regard is the 1993 Local Government Organisation Act.
Qualifying fiscal decentralisation:
Since 2000, local government expenditures in Estonia have accounted for roughly one-quarter of total government expenditures. As indicated in the chart below, local expenditure in 2018 was 25%. Local governments are given limited autonomy over how to finance their expenditures: in 2018, 54%% of local revenues were derived from the personal income levy, a tax which is shared with the central government. Land tax is fully determined by local authorities which can apply different rates within fixed boundaries set at the central level. Within the limits prescribed by national law, local authorities are also free to levy other local taxes (which accounted for roughly 3%% of local revenues in 2018) and user charges. Transfers from the central government (block grants, earmarked grants and an equalisation fund) are the second largest source of revenue for local authorities (29.9% in 2018). Local governments can generate revenues from their economic activities, property incomes and sales of property.
Source: authors’ elaboration on EUROSTAT data. For further details, see
methodology.
Fiscal equalisation mechanisms
Fiscal equalisation across local governments is performed through an equalisation fund. In 2017, the amount of transfers granted by the equalisation fund accounted for 0.85% of central government expenditures. The exact amount transferred from the fund to each local government is defined in the yearly state budget negotiations and is based on two major principles: an average expense need based on population size and age structure, and the weighted lagged accounting revenues of each local administration.
LEVEL OF FISCAL DECENTRALISATION
Revenue autonomy (own revenues relative to total resources available) at the sub-national level was below the EU average (13% versus 53%) in 2018, which entails a rate of dependency on central government transfers that is higher than the EU average (88% versus 48%). Local own revenues represented 3% of total government revenues in 2018, a value lower than the EU average (13%).
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.
The composite ratio, which captures aspects of fiscal decentralisation of both revenue and expenditure, suggests that the governmental structure in Estonia has a degree of fiscal decentralisation that is substantially lower than the EU average. In 2018 these were 4% and 16% in 2018 respectively. Sub-national government tax autonomy is characterised by little autonomy over rates and reliefs (8%), by a large share of tax revenues over which local authorities have restricted discretion (85%), and by a small minority (6.9%) of shared taxes controlled by the central government.
Source: authors’ elaboration on EUROSTAT data. For further details, see
methodology.
Fiscal rules and borrowing capacity
In principle, local authorities are free to access debt markets (loans, debt securities, leasing) to finance the difference between their expenditures and revenues. From 2009 to 2012, special provisions limiting the amount of outstanding debt were put in place to limit excessive debt accumulation by local governments due to the erosion of the revenue base during the financial crisis. The Local Government Financial Management Act of 2012 reinforced fiscal discipline and transparency of the financial governance of local governments. The Act included a net debt ceiling (debt minus liquid assets) of between 60% and 100% of the operational revenues of the current year, depending on the self-financing capacity of the local body.
Deficit and debt at sub-national levels
During the peaks of the financial and euro crises, the Estonian local government saw increases in their net borrowing rates. In 2008, net borrowing rates reached a high of -0.6%, and in 2013 it reached -0.5% after having fallen. Similarly, debt levels had increased between 2011 to 2014 from 3.2% to 3.8% but has since fallen to 2.9% in 2018. In 2018, local governments were net lenders with a rate of 0.2%.
Source: authors’ elaboration on EUROSTAT data. For further details, see
methodology.
EXPENDITURE BY GOVERNMENT LEVEL AND BY POLICY AREA
Expenditures of municipalities represent a significant part of total government expenditures in the fields of housing and community amenities (almost the totality at 99.8% in 2017), education (64% in 2017), recreation culture and religion (42% in 2017), environmental protection (40% in 2017), economic affairs (35% in 2017), and health (28% in 2017).
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.
The share of total municipal spending is frequently higher than the EU average in the fields of education (39% of total local spending in 2017), economic affairs (16% in 2017) and health (15% in 2017). Other relevant areas of spending are recreation, culture and religion (9% in 2017), social protection (8% in 2017) and general public services (7% in 2017).
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.
