OVERVIEW OF FISCAL DECENTRALISATION
The governance structure of Montenegro is based on two levels: the central government and 23 local government units (21 municipalities, the capital city and the historical capital).
Legal acts governing fiscal decentralisation
The funding of local government bodies is ruled by the Local Government Finance Law, while the Law on Local Self-Government defines the competences of local administrations.
Qualifying fiscal decentralisation
According to the Local Government Finance Law, local governments are assigned funding from: own revenues (local taxes, local charges and fees); assigned revenues (shared taxes, including 12% of personal income tax); the equalisation fund; and the state budget (in the form of conditional grants). In 2011, own revenues accounted for 54% of total local government revenues, shared revenues for 14.9%, the equalisation fund for 10.8%, and other transfers for 1.1%. Local government functions are nevertheless quite limited (they do not include responsibilities relating to health care and education) and the size the local governments’ revenues compared to national GDP has shrunk from 11% in 2007 to 5.8% in 2011 due to the difficulties that local governments have encountered since the outbreak of the financial crisis. A similar path has been followed by the share of local revenues of total government revenues, which fell from 22% in 2007 to roughly 15% in 2011.
Fiscal equalisation mechanisms
A fiscal equalisation mechanism across local governments is available through a fiscal equalisation fund. This fund, taking into consideration the fiscal capacity and the expenditure needs of each municipality, redistributes resources to all municipalities that recorded an average per capita fiscal capacity during the three previous years that was lower than the national average. The equalisation fund is financed from municipalities’ contributions according to the following proportions: 11% from personal income tax, 10% from tax on real estate’s transfers, 100% from tax on the use of motor vehicles and aircrafts, and 40% from concession fees for gambling.
Deficit, debt at sub-national levels and borrowing capacity
Article 64 of the Law on Local Government Finance states that “a municipality may be indebted in a such way that the total payments of principal and interest, payments under a leasing contract, repayment of obligations for prior period and any other obligations that have the character of the debt may not exceed 10% of the realised current income in a year preceding the year of borrowing, with the previous approval of the government.” The financial crisis hit municipalities’ finances hard, such that borrowing and loans in 2011 accounted (on average) for 10.2% of local revenues, meaning that many municipalities exceeded the allowed borrowing limit. The central government intervened in two ways to rescue municipalities: first, a new legal framework was enacted in 2011 increasing the participation of local governments’ in shared taxes and improving the resources of the equalisation fund; second, distressed municipalities have been offered agreements by the central government entailing financial aids subject to restructuring programmes. At the end of 2011, local government debt amounted to 96 million euros, corresponding to 3% of national GDP.
