Fiscal decentralization and intergovernmental finances in the Republic of Albania

Abstract

Economic decentralization emerged as an issue in Albania following the first election of a noncommunist government in Albania in 1992. It is one of many challenges in creating a fiscal system that supports reform. Decentralization has begun with the central government's transferring spending responsibilities primarily for some local infrastructure services to local governments. But, given Albania's small size, it is unclear whether"people"services such as education and health care need to be delegated to local governments. Although the destruction of local health and education facilities accompanying the demise of the old regime argues for giving communities a greater sense of ownership of these facilities, they should not be handed down without mechanisms to ensure uniform service standards. Draft laws focus on the transfer of assets (schools and clinics) to local jurisdictions but are vague about responsibilities for recurrent spending. And because local spending responsibilities are expanding, local governments need increased revenues to finance them. Providing an adequate social safety net is vital in Albania - the poorest of the economies in transition - and the government has taken steps to ensure that parts of it are locally administered, though centrally funded. The key to a well-designed intergovernmental financial system is to clearly define spending responsibilities so that a revenue system can be designed to accommodate them. Such a system would combine revenue-sharing, own-source revenues, and intergovernmental transfers. Tax-sharing of central government revenues based on district of origin cannot be the only means of local finance in Albania, as most revenues are collected in only a few districts. To meet financial needs, local governments need some authority over significant own-source revenues (such as user charges and property and vehicle taxes). Privatization revenues can also help local governments but only in the short run, as they are nonrecurrent. Matching grants with spillover effects may be appropriate. And for low-income regions incapable of meeting their spending needs alone, a transparent, equalizing transfer system should be developed. Albania's draft laws allow for this possibility, having established constituent and independent budgets for the local level.National Governance,Banks&Banking Reform,Municipal Financial Management,Public Sector Economics&Finance,Public&Municipal Finance