Albanian Local Government Finance on the Eve of Territorial Consolidation
35 Pages Posted: 17 Oct 2014
Date Written: September 25, 2014
This paper reviews local government finances in Albania on the eve of the government’s plan to decrease the number of municipalities from 373 to 61. The paper argues that without changes in the current intergovernmental finance system, territorial consolidation is unlikely to be accompanied by improved service delivery. This is because Albanian local governments are underfunded and receive less revenue than their counterparts in the region measured both as a percentage of total public revenues and of GDP. The current intergovernmental finance regime is also “over-equalizing” and is depriving the country’s larger jurisdictions -- particularly Tirana -- of the resources they need to build network infrastructure. These problems cannot be resolved by the efficiency gains that should come from consolidation. Nor is better property tax collection fix likely to transform the situation. Instead, the national government needs to provide municipalities with new grants and transfers. One possibility here is to introduce income tax sharing, a reform that would also make it possible to anchor the equalization system in an objective measure of relative wealth. Eventually, income tax shares could be transformed into local surcharges.
Keywords: Albania, local government, finance, income tax, reform, Tirana
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