Financial Decentralization and Fiscal Imbalance of Local Budgets in Ukraine

Abstract

The purpose of the article is to identify the correspondence between the revenue and expenditure parts of local budgets, which are responsible for the significant part of state expenditure financing due to financial decentralization reform. The article provides a comparative analysis of decentralization levels of local budgets in Ukraine and European countries by revenues and expenditures, as well as analyzes the structure of revenues and expenditures of the consolidated budget which include state and local budgets. The article notes that over the past ten years, the gap between revenue and expenditure has narrowed due to decentralization reform, but fiscal balance has not been achieved. The results of the analysis demonstrate the existence of a significant vertical imbalance in the budget system of Ukraine, which consists in the insufficiency of own and fixed financial resources of local authorities to ensure their powers. In terms of income decentralization, Ukraine ranks middle among Eastern European countries, while the level of expenditure decentralization corresponds to the level of Scandinavian countries, where the state plays an active role in income redistribution and has high institutional efficiency and high social standards. The article substantiates that the vertical imbalance exist due to the inefficient structure of local budgets’ revenues, in particular the high share of transfer payments from the state budget to local budgets, as well as the low share of own revenues, namely local taxes, in tax revenues. In order to strengthen the revenue side of local budgets and reduce vertical imbalances it is proposed to increase the tax base of local taxes through development of business and welfare in the regions, to increase the share of deductions from corporate tax and personal income tax to local budgets, to improve the control over local budget revenues and to optimize local expenditures, including social protection and social security expenditures. As the practice of foreign countries with decentralized budget systems shows, the elimination of vertical imbalances leads to a significant increase in the fiscal capacity of the regions.

Keywords

• inancial decentralization
• local budget
• vertical fiscal imbalance
• budget transfers
• local taxes
• budget revenues
• tax revenues
• budget expenditures