Decentralization in public administration and its

impact on local budget

INTRODUCTION

This paper will refer to the process of decentralization in public administration

and how it affects the budget making, the local budget making. In centralized

governance, all the funds, all the revenues come from central authority, directly or

indirectly, on legal basis, by taking a part of local taxes and using them on local public

needs.

What means decentralization? Many answers, many interpretations and a general

accepted idea: to take power from central and to give it to local, to protect interests,

individuals and community identity.

Why decentralization and not federalism? Here we have a polemic situation: we

find many arguments, for and against each idea. Decentralization can be a reversible

process, can be improve easier than federalism, which implies statutory political identity,

a sovereignty split between units and the center.

This complex process of decentralization refers to three dimensions: political,

administrative and financial or fiscal. Local budget suffers because of this transformation,

of this transfer from center to the territorial units. Romania is a country that had to choose

an alternative to a centralized, planned economy, centralized control after 1989. The

process of decentralization it’s still running, central authority is looking for the best way

to manage, under these three dimensions, the territory. An answer was found, in terms of

regional approach, but this does not cover all the issues, all problems.

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 From all the dimensions, the financial one is the most sensitive dimension. What

does it means local financial autonomy, financial decentralization for local budget?

This paper will try to answer to all these questions, relating all the time at

Romania’s situation. We will find out the sources from which central and local authority

is looking for incomes, to survive and to satisfy people’s needs.

GENERALITIES

There are many accepted definitions of decentralization. Ones are looking to offer

a general view on the topic, others are more specific. We will present two of them,

related to what exactly and basically the term means.

“One of the more important findings appeared to be the understanding of

decentralization as a political as well as a technical process including, but not limited to,

administrative structures. As for the underlying philosophy, the team saw much use in the

principle of subsidiarity, which requires that decisions be taken at the lowest level

possible, from family, neighborhood and community to different levels of local, regional

or national government.” “Decentralization is a process of transferring power to

popularly elected local governments. Transferring power means providing local

governments with greater political authority (convene local elections or establish

participatory processes), increased financial resources (through transfers or greater tax

authority), and more administrative responsibilities”1.

1
Decentralization and democratic local governance programming handbook, Center for Democracy and
Governance, http://www.usaid.gov/our_work/democracy_and_governance/publications/pdfs/pnach300.pdf,
p. 2

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 Centralization and decentralization in public administration it’s a problem of

every state, no matter its structure, government or the political system. Being a public

power, organized on a limited territory and recognized by other states, each state has the

role of representing the population and of solving their problems. The interests that have

the individuals are different, as the ones of groups. For exerting these roles the state is

dividing the territory and the population in different areas: on geographic, cultural,

religious basis. These areas have different names in history: counties, communities,

towns, villages. So, the state created in these units public authorities, for representation

and for action on the behalf of its authority, for common interests and common problems.

Decentralization is a complex process, very different from country to country. It

implies a high responsibility for local authorities, in terms of political, administrative and

financial coordinates. There are many types of decentralization, we can have delegation,

devolution, deconcentration and other ones. Those three types are the most used and

known in this process. A very clear distinction is done between federalism and the other

types: delegation, devolution, deconcentration.

Federalism is the theory or advocacy of federal political orders, where final

authority is divided between sub-units and a center. Unlike a unitary state, sovereignty is

constitutionally split between at least two territorial levels so that units at each level have

final authority and can act independently of the others in some area. Citizens thus have

political obligations to two authorities. The allocation of authority between the sub-unit

and center may vary, typically the center has powers regarding defense and foreign

policy, but sub-units may also have international roles. The sub-units may also participate

in central decision-making bodies. Much recent philosophical attention is spurred by

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renewed political interest in federalism, coupled with empirical findings concerning the

requisite and legitimate basis for stability and trust among citizens in federations.

Philosophical contributions have addressed the dilemmas and opportunities facing

Canada, Australia and Europe, to mention just a few areas where federal arrangements

are seen as interesting solutions to accommodating differences among populations

divided by ethnic or cultural cleavages yet seeking a common political order.2

Decentralization or decentralizing governance, refers to the restructuring or

reorganization of authority so that there is a system of co-responsibility between

institutions of governance at the central, regional and local levels according to the

principle of subsidiarity, thus increasing the overall quality and effectiveness of the

system of governance, while increasing the authority and capacities of sub-national

levels. Decentralization could also be expected to contribute to key elements of good

governance, such as increasing people's opportunities for participation in economic,

social and political decisions; assisting in developing people's capacities; and enhancing

government responsiveness, transparency and accountability.3 What it is interesting about

this it’s that decentralization can be reversible much easier than federalism. We say that

we have one federal state and a unitary one, whether the second it’s centralized or

decentralized. If central authority considers that the decentralization process does not

work properly, it can always reverses the process without taking important political risks.

Federalism generates local sovereignty and decentralization requires only a reduced

degree of responsibility.

2
http://plato.stanford.edu/entries/federalism/
3
UNDP, Decentralized Governance Programme: Strengthening Capacity for People -Centered
Development, Management Development and Governance Division, Bureau for Development Policy,
September 1997, p. 4

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 MOTIVATIONS FOR DECENTRALIZATION

Decentralization and the development of democratic local governance continue

quietly to sweep the world. From Bolivia to Bulgaria, and from West Africa to South

Asia, a wide variety of countries are increasing the authority of local governments and

working to make them more responsive and effective. The prime motivations behind

these reforms vary. Some countries are emerging from dictatorships seeking to disperse

power among smaller governmental units. Others are reducing the size of the central

government as part of a transition to a more efficient market economy. Many others seek

to increase public involvement and accountability in government decision-making.

Where one country is responding to donor pressures for popular reform, another is hoping

that the poor performance of the national government can be overcome by allowing local

governments to provide fundamentally local public services. Even where democratic

development is not a central consideration, in those countries where genuine reform has

occurred, there are openings for continued democratic change.4

DIMENSIONS

There are three dimensions that appear when applying decentralization: the

political reform, the administrative rethinking of territory and the financial situation.

4
Decentralization and democratic local governance programming handbook, Center for Democracy and
Governance, http://www.usaid.gov/our_work/democracy_and_governance/publications/pdfs/pnach300.pdf,
p. 4

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Fiscal decentralization—who sets and collects what taxes, who makes what expenditures,

and how any "vertical imbalance" is rectified—has been especially prominent in recent

discussions in many countries, but as just indicated many of the more fundamental

questions relate to political and administrative decentralization. Political decentralization

refers at one level to the extent to which political institutions map the multiplicity of

citizen interests onto policy decisions. Administrative decentralization is concerned with

how political institutions, once determined, turn policy decisions into allocate (and

distributive) outcomes through both fiscal and regulatory actions. The political decision

to devolve powers from central government, for example, can only get translated into

actual powers being shifted if sub national governments have the fiscal, political, and

administrative capacity to manage this responsibility.5

FINANCIAL DECENTRALIZATION

A real local autonomy cannot exist without the provisions of the financial

resources needed by the local elected councils commensurate with the powers and

responsibilities they have under the law. Financial decentralization can be defined as

"transmitting by the central government of some specific functions and fiscal revenues to

the local public authorities”6.

European legislation is concerned with the local autonomy, in the article 9 of the

European Charter of Local Autonomy7, we find out that it is necessary that exist a law on

5
Litvack, J., Ahmad, J., Bird, R., Rethinking Decentralization - A Discussion Paper , World Bank, 1999,
para. 18
6
Mihai Mutascu et all, Financing of Local Development in Romania, http://mpra.ub.uni-
muenchen.de/9740/, p. 1
7
European Charter of Local Autonomy, http://conventions.coe.int/Treaty/EN/Reports/HTML/122.htm

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local finances, which should sanction the right of the local communities to have, within

the national economic policy, sufficient resources of their own which they could use

freely in the exercise of their powers. The financial resources of the local communities

should be commensurate with the power allocated to them by law and part of these

resources should originate from taxes.

The financial system, on which these resources of the local communities would

depend, should be sufficiently diversified and dynamic so as to be able to reach the

objectives they set themselves to achieve. To protect the financially poorer local

communities, it is necessary to establish a financial equalization mechanism based on

grants from the state budget. The subsidies granted to local councils should not be solved

by ministerial or governmental structures. The legislative framework should give the

right and possibility to the local councils to have free access to the national capital market

to cover investment expenditures. These are a few problems that found their solving in

this paper.

THE CASE OF ROMANIA

In Romania, the administrative reform begun in 1991. The administrative

decentralization was first mentioned and discussed as a solution in 1991, but the financial

decentralization was not a priority until 1998. Now we have a legislative framework that

assures good prospective for a real local autonomy in Romania.

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 The legal framework related to local authorities’ financial approach is made by

the following legislative documents: The Romanian Constitution (November 2003), The

Law on Local Public Administration (215/2001), The Law on Local Finances (189/1998)

Other important decisions in this area are discussed in some governmental

decisions and orders. All these documents are made in accordance with the ideas

mentioned in the article 9 of the European Charter of Local Self-government.

The Law on Public Administration8 provides that central authorities cannot

establish or impose any kind of responsibilities on local authorities in the process of

decentralization of certain public services or of creating new public services without

ensuring the adequate financial means for achieving the respective responsibilities.

Another provision is that within the national economic policy, the communes,

towns and counties have the right to own resources and these resources must be

proportional with the responsibilities stipulated by law.

The Law on Local Finances9 refers to the sources of local finances ( public

transfers – shared taxes, grants and subsidies – local property, local taxes, fees and

borrowing ). It also refers to the formation, approval and implementation of local budgets

and the financing of public services and institutions. Some new amendments enhance the

right of local authorities to establish local taxes and charges.

Concerning this aspect, we have to note that the fiscal autonomy enjoyed by the

Romanian municipalities does not match the substantial powers attributed to them by

legislation. We mention the case of small local authorities. They theoretically have an

increasing number of opportunities to raise revenues, but in reality their tax base is not
8
The Law of Public Administration (Legea Administratiei publice locale), http://legislatie.resurse-pentru-
democratie.org/215_2001.php
9
The Law of Public Finances (Legea Finantelor Publice),
http://www.cdep.ro/pls/legis/legis_pck.htp_act_text?idt=18147

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sufficiently large to benefit for them. In consequence, these local authorities continue to

depend, on most part, on general appropriations and specific state subsidies.

Speaking about local budgets, it is important to emphasize that Romanian local

authorities’ own revenue comes, for the most part, from fiscal receipts, as local taxes and

charges. About 30% of local budgetary revenue is represented by the own revenue. It

must be noticed that about 25% of the local budget receipt is based on public and private

assets of the local communities. The Constitution of Romania stipulates that “property is

public or private” and belongs “to state or territorial-administrative units”.10

The legislation must be modified, in order to give much power to local

authorities. In the same time the transfers from state must not stop, because Romania it’s

in an economic transition, although there is a functional economy. The level of state

transfers is quite high in Romania. There are two main categories of state transfers:

shared taxes and grants. The taxes are collected and then they are distributed to the

different levels of government concerned. In terms of percentages, the funds allocated to

local authorities mostly come from the income taxes and fees.

There are some equalization mechanisms for preserving the solidarity between

counties and between municipalities inside the county. The criteria used for the

equalization funds are based on the financial capacity of every county, mathematically

calculated. In the case of redistribution of funds to local councils, made by the county

councils, there are supplementary criteria, adopted by the councils. But in many cases the

political criteria prevail. Other shared funds allocated to local authorities come from the

Value Added Taxes-VAT. This revenue covers only a part of the new decentralized

services, like primary and secondary education, nurseries, offices for agricultural
10
The Romanian Constitution, (Constitutia Romaniei), http://www.constitutia.ro/const.htm

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consultancy and so on. Subventions are funds directly allocated from central level to local

authorities with a specific destination. The funds are distributed by different ministries

depending on their specific destinations. Special funds also represent revenues to local

budgets, but they are directly managed by ministries, so in fact are centralized.

CONCLUSION

The financial decentralization is an important coordinate of all process of

decentralization. It is useful to find alternative sources to satisfy people’s interests and to

become more and more autonomous, in a country like Romania, which was, for a long

time a real model of centralized, strong controlled state.

As a solution for increasing the revenues, for the regions of Romania we think

that tourism and the geographic potential is an important source and in the future, it will

become the first coordinate in designing the image of Romania.

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REFERENCES

1. Decentralization and democratic local governance programming handbook,

Center for Democracy and Governance,

http://www.usaid.gov/our_work/democracy_and_governance/publications/pdfs/pn

ach300.pdf

2. http://plato.stanford.edu/entries/federalism/

3. UNDP, Decentralized Governance Programme: Strengthening Capacity for

People -Centered Development, Management Development and Governance

Division, Bureau for Development Policy, September 1997, p. 4

4. Litvack, J., Ahmad, J., Bird, R., Rethinking Decentralization - A Discussion

Paper, World Bank, 1999, para. 18

5. Mihai Mutascu et all, Financing of Local Development in Romania,

http://mpra.ub.uni-muenchen.de/9740/, p. 1

6. European Charter of Local Autonomy,

http://conventions.coe.int/Treaty/EN/Reports/HTML/122.htm

7. The Law of Public Administration (Legea Administratiei publice locale),

http://legislatie.resurse-pentru-democratie.org/215_2001.php

8. The Law of Public Finances (Legea Finantelor Publice),

http://www.cdep.ro/pls/legis/legis_pck.htp_act_text?idt=18147

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9. The Romanian Constitution, (Constitutia Romaniei),

http://www.constitutia.ro/const.htm

10. Casandra Bischoff, Victor Giosan, Regional Development and Decentralization

in Romania: Connecting the Dots, The Fiscal Decentralization Initiative for

Central and Eastern Europe,

http://lgi.osi.hu/publications/2007/368/FDI_Regional_Development_Romania.pdf

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