Legal acts governing fiscal decentralisation

The main legal acts governing fiscal decentralisation are the Budget and Tax Codes of Ukraine, the Law "On the Principles of Regional Policy" (2015) and "On a Voluntary Association of Communities" (2015). At the end of 2014 significant changes were adopted to Budget and Tax Codes under the Law "On Amendments to the Budget Code of Ukraine on the reform of intergovernmental relations" and the Law "On Amendments to the Tax Code of Ukraine and some other legislative acts of Ukraine on tax reform" respectively, that enhanced the fiscal capacity of local councils.

Qualifying fiscal decentralisation

The share of own revenues derived from local taxes (the property tax, individual income tax) amounts to 7% of local budgets, shared taxes amount to 13% and the amount of intergovernmental transfers account for 52.4% of local revenues. The current share of local government revenue as a percentage of GDP was 22.2% in 2014 and 23.8% in 2013. There was an increase in the share of tax revenues over the last five years in the structure of local budgets. Tax revenues increased from 76.5% in 2007 to 86.8% in 2013 (without intergovernmental transfers). The largest source of revenues of local budgets is income tax.

Municipal budgets direct a much higher share of their revenues towards social and culture policy areas (education, public health, social protection and social security, culture and arts, physical culture and sports) – 86.3 % compared with 47.8% in the central budget – 47.8%. These areas constitute delegated responsibilities; their scope and mechanisms of financing are controlled by the state. As concerns spending on housing and community amenities their volume in local budget expenditures has experienced a significant reduction to 3% in 2013. The share of expenditures in local budgets on delegated responsibilities totaled to 78.9%, and the share of expenses for own responsibilities were 21.1%

Fiscal equalisation mechanism

With changes to the Budget and Tax Codes, from January 2015 local governments received a new fiscal equalizing mechanism. In addition to the basic transfers (listed below) and reverse transfers, local budgets receive target subventions on education, medicine and the grants for training workers. At the regional level the special fiscal index is based on corporate income and individual income taxes per capita of the population. At other sub-national levels, the special fiscal index is calculated on individual income tax per capita of the population.  The fiscal equalisation mechanism is financed from the national taxes and duties that come to the state budget and finances transferred to the state budget for horizontal equalisation (reverse grants)

Deficit, debt at the sub-national level and borrowing capacity

All municipalities, regardless of population size, have the right to borrow from international financial institutions. Only local governments of municipalities with over 500 thousand inhabitants have access to external debt markets above and beyond international financial institutions. Municipalities are entitled to access debt markets under Articles 16 and 74 of the Budget Code of Ukraine, which was signed in 2010 with numerous late revisions. According to Art. 6 of the Decree #110 of the Cabinet of Ministers of Ukraine the amount and terms of any borrowing or debt restructuring by municipalities should be approved by Ministry of Finance. In 2013 the total amount of local government debts on loans amounted 10 % of total local revenues. After a significant reduction of the subnational debt in 2011 (down to 1.01% of GDP), it started to rise again in 2013 and amounted to 1.5% of GDP.

78 % of municipal debt constitutes internal loans, while external borrowing is 21 %. The largest loans were taken out by local governments from the Treasury (58.6% in 2013). From 2011 to 2013 the share of banks' loans was significantly reduced from 26% to 5.3% respectively. In addition, the debt obligations of local budgets on securities increased to 35% in 2013. The highest external borrowings come from European Bank of Reconstruction and Development and Nordic Environment Finance Corporation. The total debt of local budgets in 2013 accounted for 21 billions hryvnia, corresponding to 1,5% of GDP.

In 2015 with the changes to the Budget Code a simplified procedure for local government borrowing and guarantees were introduced based on the principle of "tacit consent" in such transactions agreed with the Finance Ministry (Article 74) Besides, all local authorities got the right to borrow from international financial institutions (Article 16)

Local governments adhere to the debt ceiling limit which is set at the level of 200% (for Kyiv - 400%) of the average indicative forecast revenue development budget (excluding the amount of local debt and capital transfers (subsidies) from other budgets.  In 2013, 472 of the 692 local budgets did not fulfill the estimated budget indicator that is more than 68%.