The need of municipal fiscal equalization reform in Estonia. Kohalike omavalitsuste rahastamise tasakaalustamise reformi vajalikkus Eestis

Abstract

Estonian municipalities have to perform a broad range, while their fiscal resources are often limited in comparison to functions and large disparities in fiscal capacity prevail among them. Moreover, the power to regulate fiscal affairs is mostly in the hands of the central government. Municipalities do not possess satisfactory development planning perspectives. In particular municipalities in the North-East region and South Estonia have experienced considerable fiscal stress. We discuss how a strict application of the connexity principle can protect municipalities from the fiscal bottleneck. We also recommend the introduction of the principle of parallelism and investigate its effects on the down-flow grant system in Estonia. The procedure of determining the total sum of block grants needs to be changed. In most cases a high degree of parallelism applied when providing the unconditional grant via the equalization fund improves the fiscal stability and predictability of Estonian municipalities.