OVERVIEW OF FISCAL DECENTRALISATION
Portugal is made up of 308 municipalities and has no formal regional level except for the purposes of EU regional policy planning. The exceptions are the autonomous regions of Madeira and the Azores which are vested with more fiscal and financial responsibilities and powers than mainland municipalities and are also themselves sub-divided into municipalities.
Legal acts governing fiscal decentralisation
Fiscal responsibilities between local and central governments are regulated by the Local Finance Law and the Regional Finance Law.
Qualifying fiscal decentralisation
Portugal is a quite centralised country – in 2018, only 14% of the total public expenditures were paid out by sub-national governments (see the pie-chart below). In 2018, 32% of the revenues of the municipalities derived from transfers from the central state. Municipalities' own revenues are composed of: a share of the state's personal income tax (5%); own taxes (on property, part of the corporate income tax (up to 1.5% of local corporate taxable results); fees and fines); and block grants and earmarked grants from the central government. State law defines the limits within which local authorities can exercise tax powers and sets precise boundaries for the autonomy of local governments over the modification of tax rates.
Source: authors’ elaboration on EUROSTAT data. For further details, see
methodology.
Fiscal equalisation mechanisms
Fiscal equalisation across municipalities is through two funds financed by central government block grants: the General Municipal Fund and the Municipal Cohesion Fund. These two funds, roughly of equal size, are intended to provide each municipality with a level of financial resources adequate for the extent of its needs, once the nature of such expenditures and the idiosyncratic ability to generate own resources are taken into consideration.
LEVEL OF FISCAL DECENTRALISATION
Revenue autonomy (own revenues relative to total resources available) at the local level (regions and municipalities) is above the EU average (68% versus 53% in 2018), which entails a dependency on central government transfers that is lower than the EU average (33% versus 48% in 2018). Local own revenues represented 9% of total government revenues in 2018, a value lower than the EU average (13%).
The composite ratio, which captures aspects of fiscal decentralisation relating to both revenue and expenditure, suggests the sub-national governments in Portugal have a degree of fiscal decentralisation (11% in 2018) that is lower than the EU average (16% in 2018).
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.
The level of tax autonomy shows no discretion for local authorities over rates and reliefs; these are set by central government. On the other hand, local authorities have a larger degree of autonomy over tax revenues over which local governments have restricted discretion (76.3%). Of the revenues from local taxes, 91.9% are directly retained by the local authorities and 8.1% are shared with the central government. The transfer dependency is below the EU average (33% and 48% respectively in 2018).
Source: authors’ elaboration on OECD data. For further details, see methodology.
Fiscal rules and borrowing capacity
The Local and Regional Finance Laws defined net debt ceilings, borrowing constraints for local governments, and a debt service rule for regions. The 2012 budget law prohibited any increase in the net debt of regions and municipalities. This target temporarily supersedes all the other borrowing constraints. The former general rule prescribed that net-indebtedness of municipalities could not exceed 125% of the sum of own taxes, shared taxes, intergovernmental transfers and dividends from municipal enterprises recorded in the previous year, but allowed for a significant number of exceptions to this rule. This framework, combined with the implicit guaranteed bailout by the central administration in the case of default and easy credit access, created a critical positive correlation between debt stock accumulation and economic up-turns and triggered financial difficulties in debt-servicing expenditures during declining phases of the cycle. As a consequence of this, regional and local governments built up significant amounts of debt over the last decade, in line with the overall public administration debt growth.
In 2013 the new local finance law was reviewed and the new Local Finance Act was approved (Law nr. 73/2014 of 3 September). The new borrowing limit for a municipality was set at 150% of the average municipal total net revenue of the previous three years. Municipalities that exceeded this debt ratio threshold are obligated to reduce the excess by a minimum of 10% a year until reaching the threshold. Municipalities that did not exceed the threshold by the end of the year 2013 cannot increase their debt levels to more than 20% of the gap between the current debt ratio and 150% in a given year. Failure to comply with these limits implies a financial restructuring plan, with severity according to debt ratio levels. Between 150% and 300% of the debt ratio, the financial restructuring plan involved budgetary cuts (namely, capital and personnel expenditures), maximising local tax rates and alienating assets. For debt ratios above 300%, a new resolution mechanism was established (see below).
As a consequence of the 2013 Local Finance Act, a new intermunicipal permanent mechanism to deal with municipal bankruptcy or excessive debt levels was recently established – the Municipal Resolution Fund (Law nº 53/2014 of 25 August). This law sets up a new fund which is co-funded (50-50) by the central government and the 308 local municipalities.
Municipalities whose debt ratio exceeds the maximum threshold – i.e. whose net debt exceeds three times the average net municipal revenue of the previous three years – are now obligated to follow the new municipal adjustment plan. This plan includes access to the resolution fund conditioned by several rules, including maximising all local tax rates, introducing several cost-cutting measures and negotiating haircuts with debtors (with repayment prioritised for debtors who voluntarily accept partial losses). Municipalities whose debt ratio is greater than 2.25 but below 3 can voluntarily request access to the resolution fund but are not obliged to do so.
Deficit and debt at sub-national levels
In 2014, the consolidated gross debt of the Portuguese local government sector amounted to 6.4% of GDP, a value that had increased by 4.3 percentage points since 2000. The figure has since fallen to 5.1% in 2018.
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 share of total general government expenditures in the fields of housing and community amenities (almost the totality, 96% in 2017), environmental protection (85% in 2017) and recreation, culture and religion (62% in 2017).
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.
Municipalities' spending is more concentrated than the EU average in the fields of general public services (30% of total local spending in 2017), economic affairs (17% in 2017),culture, recreation and religion (9% in 2017), housing and community amenities (9% in 2017) and environmental protection (8% in 2017). In all other areas of spending, expenditures are below the EU average values.
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology
