The new horizon for local government

Petar Ganev, Institute for Market Economics

The second round of the election will pass and it is time to look to the horizon beyond the release of the ballot and the election night of the commentators and the endless graphics on the televisions. Traditionally, the focus on local government will quickly disappear and everyone will rush to talk about the future of government. The budget is a ticking time bomb - in a political and fiscal sense, where, if the "assembly" has not been sufficiently shaken by the circus with the machine vote (first hash code, second well-known analog faces), the dispute over public finances can easily to overturn any plans for rotation and political stability. Talk of the constitution will also kill any thought of local government. However, regardless of whether we see a breakdown in governance, the election gives new energy to local government that will be there for the next four years. It is therefore important to outline some directions of development that seem likely.

Expectation of higher taxes at the local level

It's good to say it before the second round. Some local taxes and fees will increase in the coming years. First, because they are very low and this will not last forever - in the country, people pay more for an annual vignette than for tax on their property. And secondly, because the structure of state finances is wrong, it drains municipalities of their own revenue, makes them dependent on transfers and gifts from the central government, and leads to a chronic lack of resources even in years of plenty for the state treasury. In addition to this, the expectation is always of some sort of rise in council charges at the start of a new local government term. However, there is an important detail here. Raising local taxes and fees will not be the work of the new municipal councils.

The largest revenue for municipalities usually comes from the tax on property transactions - however, there, municipalities are at the maximum by law and there is no longer room for an increase in the amount of the tax. The focus would rather fall on property taxation, but not on the rate, but on the tax assessment. The administrative model of tax assessments has not been meaningfully changed for over 10 years, it does not have dynamic components related to the market value of properties, which means that the tax assessment itself has missed the development of the property market in the last decade. It seems more than likely that Parliament will tackle property tax valuations (appendix in the LTA) by either changing the so-called location factor (the easy way to update tax valuation) or moving towards some form of quasi market valuation for purposes of taxation. In both cases, the expectation is for a significant increase in the property tax, provoked by changes in the law.

A new model for financing regional investments

Political instability and the lack of a strong player to hold political power should lead to a different model for financing large investment projects of regional and municipal importance. The model of the SUV and the black box of the central budget - by which you can build a large boulevard in Varna or two new stadiums in Plovdiv - seems difficult to implement at the moment. If the absence of a strong power concentrated in only one party leads to clear rules for the financing of regional and municipal projects and a form of capital program that is not hidden in the central budget but is public and voted in the parliament, this could be a of the most meaningful achievements of the "assemblage".

Less strategy, more projects and work

Over the past three years, the municipalities in Bulgaria have thrown enormous energy into strategic planning - so-called plans for integrated development for the period 2021-2027, mainly related to the absorption of European funds under the new operational programs. This process turned into an endless pain that tore the local government between real work and trying to fit the colorful life in a municipality into the boxes of the various European projects. Anyway, it's over now. The new local authority will not have the task of writing strategies yet, but will have to quickly orientate itself in the realization of the planned and in some cases - already started - large projects, as well as in the new funding opportunities - especially the sadly rewritten and sluggish National recovery and resilience plan. Opportunities to finance transformation at the local level in any sense of the word currently exist, and that is precisely why the difference between working local authorities and those whose main task was winning the elections will be very clearly seen.

A strong role for municipal investment units

In the last 4-5 years, a constant trend of formation of investment attraction teams has been observed in the leading municipalities in the country. The models are different - sometimes it is a separate municipal agency (such as SOAPI in Sofia), sometimes it is a strong directorate in the municipality (as is the case in Stara Zagora), and sometimes it is an active deputy mayor who is responsible for business development. These teams are starting to appear more and more often on the regional map and even looking for opportunities to cooperate with each other. It is entirely achievable that in the next four years, the shaping of the vision and marketing of the investment destinations in the country, as well as the planning for the development of industrial terrains, the shaping of high-end business spaces and partnerships with educational institutions will happen to a greater extent between these teams, and not primarily in central government offices. The role of the large economic centers outside Sofia, which can be much bolder in their role to change the regional map, will also be important here.

Unblocking the conversation on financial decentralization

The common denominator of all these topics is the change in the structure of public finances and the strengthening of the role of the municipality. Despite the available potential at the local level, including various possibilities for financing large investment projects, without financial independence of municipalities and linking the local budget with the local economy, the mayor will never have a clear horizon in front of him. The reorganization of the local government in the country is the best occasion to open the conversation about financial decentralization, incl. for revenue sharing from certain direct taxes. Whatever local level investment funds are made by the central government; they cannot sweep away the injustice of draining a resource from the regions.