Local Financial Autonomy in Theory and Practice: the Impact of Fiscal Decentralisation in Hungary
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Although financial autonomy is a recurrent notion in the literature on Theory and Practice in Autonomy Local Financial Krisztina Beer-Tóth fiscal federalism and decentralisation, it has seldom been the focus of scientific analysis. This book explores the meaning of financial autonomy at subnational levels of government, its relationship with the principle of subsidiarity, as well as its impact on the three economic branches of government activity: allocation, distribution, and stabilisation. The major contribution of the book is a structured overview of the factors that may potentially impinge on the freedom Local Financial Autonomy of subnational authorities with regard to their budget decisions. This analytical tool may help pave the way towards the elaboration in Theory and Practice of more accurate techniques for measuring subnational financial autonomy in future. A tentative application of the new theoretical framework is provided in the second part of the book that delves into the complex issues of municipal revenue and expenditure autonomy in Hungary after 1990. The Impact of Fiscal Decentralisation in Hungary Krisztina Beer-Tóth Thesis presented to the Faculty of Economics and Social Sciences at the University of Fribourg Switzerland in fulfilment of the requirements for the degree of Doctor of Economics and Social Sciences Accepted by the Faculty Council on 27 May 2009 at the proposal of Professor Dr Bernard Dafflon (first advisor) and Professor Dr George Guess (second advisor) Fribourg 2009 ISBN 978-3-033-02165-5 Local Financial Autonomy in Theory and Practice Local Financial Autonomy in Theory and Practice The Impact of Fiscal Decentralisation in Hungary Thesis presented to the Faculty of Economics and Social Sciences at the University of Fribourg Switzerland in fulfilment of the requirements for the degree of Doctor of Economics and Social Sciences by Krisztina Beer-Tóth from Budapest. Accepted by the Faculty Council on 27 May 2009 at the proposal of Professor Dr Bernard DaZon (first advisor) and Professor Dr George Guess (second advisor) Fribourg 2009 The Faculty of Economics and Social Sciences at the University of Fribourg neither approves nor disapproves the opinions expressed in a doctoral thesis. They are to be considered those of the author. (Decision of the Faculty Council of 23 January 1990) Typeset with LATEX in Minion and Syntax. Copyright © 2009 Krisztina Beer-Tóth All rights reserved. ISBN 978-3-033-02165-5 Acknowledgements During my journey into the recesses of local financial autonomy, I have benefited from the generous support of a great number of people. It goes without saying that all of them are blameless for any defect in the final result. First, I am deeply indebted to my thesis supervisor, Prof. Dr Bernard DaZon, for his invaluable guidance and insights throughout the entire project. His generous and lively interest in the manuscript, his passionate style of reasoning, and his personal integrity have always inspired me. I am also grateful to him for his paternal care and many a great moment of conviviality in and outside Fribourg. My thanks are also due to the second assessor of the thesis, Prof. Dr George Guess, for his constructive comments on both the initial concept and the final manuscript. He encouraged me to keep focusing on local autonomy as this was an interesting feature of fiscal decentralisation. His great sense of humour as well as his tolerance and openness towards other cultures have truly impressed me. I benefited from fruitful discussions with Gábor Péteri and Edit Kusztosné Nyitrai in Budapest. Their patient interest in my research questions and their progressive ideas about fiscal decentralisation in Hungary have been a great source of inspiration. I imposed more than once on the intellectual power of Éva Judit Rozsi and her team at the Ministry of Finance in Hungary. Without their accurate and timely supply of data, I could not have said anything substantive on the financial autonomy of local governments. My colleagues at the Chair for Public Finance, Steve Perritaz, Michel Blum, and Peter Mischler, have been strong supporters all along. They took a real interest in me and encouraged me whenever I doubted my ability to finish the thesis. I will never forget our lively discussions during coVee and lunch breaks. Ralf Lutz deserves special thanks for helping to give the thesis its proper direction vi and structure. He also helped me to overcome long-lasting anxiety as to whether my work was good enough to be considered for publication as a doctoral thesis. I owe a great debt to my family for their love and support and for continuing to ask how the project is coming along. And my final note of thanks goes to my husband, Michael, for taking on the burdensome task of typesetting the final manuscript and, more important, for reassuring me all along that my eVort of writing a thesis was not useless. Without his true love and faith, this work would not have been possible at all. Finally, I trust upon the reader’s indulgence with regard to any piece of informa- tion that may have become outdated by the time this thesis is in press. Berne, in September 2009 Abstract Although financial autonomy is a recurrent notion in the literature on fiscal fed- eralism and decentralisation, it has seldom been the focus of scientific analysis. This book explores the meaning of financial autonomy at subnational levels of government, its relationship with the principle of subsidiarity, as well as its impact on the three economic branches of government activity: allocation, distribution, and stabilisation. The major contribution of the book is a structured overview of the factors that may potentially impinge on the freedom of subnational authorities with regard to their budget decisions. This analytical tool may help pave the way towards the elaboration of more accurate techniques for measuring subnational financial autonomy in future. A tentative application of the new theoretical frame- work is provided in the second part of the book that delves into the complex issues of municipal revenue and expenditure autonomy in Hungary after 1990. Résumé Bien que l’autonomie financière soit une notion fréquemment utilisée dans la littérature du fédéralisme financier et de la décentralisation, elle a été rarement au centre de l’attention scientifique. Ce livre explore les acceptions du terme de l’autonomie financière, sa relation avec le principe de subsidiarité, ainsi que son impact sur les trois branches de l’activité économique du gouvernement : l’allocation, la redistribution et la stabilisation. L’apport principal du livre est un synoptique des facteurs ayant la capacité de restreindre la marge de manoeuvre des collectivités locales dans la prise de décisions budgétaires. Cet outil d’analyse peut contribuer à tracer la voie vers le développement de techniques de mesure d’autonomie plus précises dans l’avenir. Une ébauche d’application du nouveau cadre théorique est proposée dans la deuxième partie du livre qui oVre également une analyse approfondie des défis complexes relevant de l’autonomie budgétaire des communes de la Hongrie depuis 1990. Ismerteto˝ Noha a költségvetési önállóság fogalma a fiskális föderalizmus és decentralizáció irodalmában rendszeresen felmerül, a témáról eddig ritkán készült tudományos elemzés. A jelen kötet tüzetes vizsgálatnak veti alá a helyi önkormányzati költ- ségvetési önállóság mibenlétét, a szubszidiaritás elvéhez való viszonyát, valamint a helyi autonómiának az állami gazdaságpolitika három alapveto˝ feladatára, az allokációra, a disztribúcióra és a stabilizációra gyakorolt hatását. A tanulmány fo˝ eredményként rendszerezett áttekintést nyújt mindazokról a tényezokr˝ ol,˝ amelyek korlátozhatják a helyi önkormányzatok önállóságát egyes költségvetési döntések meghozatalában. Ez az elemzo˝ eszköz a szerzo˝ reményei szerint a jövoben˝ támaszul szolgálhat a mainál pontosabb mérési technikák kidolgozásában. A kötet második része kísérletet tesz az új elméleti keret alkalmazására és egyúttal részleteiben tár- gyalja a magyarországi települések 1990 utáni kiadási és bevételi autonómiájának komplex összefüggésrendszerét. Contents 1 Introduction ................................... 1 I Theoretical Approaches to Local Financial Autonomy 2 The Changing Perspective on Fiscal Decentralisation........... 11 2.1 The neoclassical approach to fiscal decentralisation . 11 2.1.1 Elements and assumptions . 11 2.1.2 Limitations and challenges . 15 2.2 The New Political Economy approach to fiscal decentralisation . 21 2.2.1 Premises and directions . 21 2.2.2 Relevance. 25 3 Local Financial Autonomy ........................... 29 3.1 The concept of local autonomy . 30 3.1.1 Early definitions: local autonomy as a right . 30 3.1.2 Recent definitions: local autonomy as right and ability . 36 3.2 Local autonomy as a valence issue . 47 3.3 The relative importance of local autonomy . 52 3.3.1 The benefits of local autonomy. 52 3.3.2 Trade-oV with economic eYciency . 56 3.3.3 Trade-oV with equity. 62 3.3.4 Trade-oV with stability. 66 3.3.5 Trade-oV with political objectives . 69 3.4 The concept of local financial autonomy . 70 3.4.1 Components and constraints . 70 3.4.2 Expenditure autonomy . 73 xiv 3.4.3 Revenue autonomy . 80 3.4.4 Budgetary autonomy. 89 3.5 Measuring local financial autonomy . 97 3.5.1 General measures . 97 3.5.2 Measuring expenditure autonomy. 98 3.5.3 Measuring revenue autonomy . 107 3.5.4 Measuring budgetary autonomy . 124 3.6 The principle of subsidiarity . 125 3.6.1 Decentralisation—autonomy—subsidiarity . 125 3.6.2 The origins of the principle of subsidiarity. 126 3.6.3 Subsidiarity in Europe . 130 3.6.4 Subsidiarity and local (financial) autonomy . 134 II Local Financial Autonomy in Practice: The Case of Hungary 4 Legal and Institutional Framework ...................... 139 4.1 Constitutional and legal foundations of the decentralised public sector 140 4.2 Equality and asymmetry . 148 4.2.1 Territorial administrative organisation . 148 4.2.2 Categories of subnational governments. 152 4.2.3 Equal rights—diVerent duties .