Zymne village, Rivne oblast. Source: buh
Decentralization in Ukraine implies two important results for long-term economic growth: (1) more local taxes being paid and (2) reduction of expenditures on local government.
Decentralization reform in Ukraine commenced in 2014. The success of the reform in achieving the declared goal was discussed mainly in the discourse of improving the quality of public services provided in amalgamated villages and cities.
However, a crucial aspect is almost completely ignored in research and public debates: the reform impact on the economy.
In order to estimate the net economic effect of the reform, the authors analyzed the types of local budget revenues and expenditures whose change may consistently be tracked both before and after the reform.
After amalgamations, the existing ATCs were able to increase net tax revenues from several types of local taxes (e.g. single tax on individuals and on legal entities, real estate rent, tourist fee).
The amalgamation of local communities resulted in an increase in revenues from real estate tax by +121.7% and from tourist fee by +8.8% (per capita). As a result of amalgamations, there was also an increase in revenues from the single tax on individuals by +5.4% and from the single tax on legal entities by +23.4% (per capita).
Local expenditures had grown faster after the formation of an ATC, namely – per capita expenditures on roads management, housing and public utilities, sports events and facilities, leisure clubs, libraries, museums and exhibitions.
But development expenditures grew even faster. In general, territorial consolidation has led to a two-fold increase in development expenditures (+437.1%) compared to an increase in consumption expenditures (+198.9%) per capita. This means that after the formation of an ATC, local authorities spend more on long-term development, restoration and reconstruction programs than on incidentals (street lighting, utilities and energy bills, purchase of small inventory, etc.).
Before the reform, development expenditures were 3-4.5 times smaller than consumption expenditures:
Simultaneously, ATCs have spent less on local bureaucracy. This may indicate the effect of economies of scale, as there are fewer people working in the local government bodies of ATCs than there were cumulatively in the local government bodies of the villages that consolidated into an ATC:
Thus, already in the first two years, the reform achieved the expected results.
The final stage of the reform is currently underway, but it ignores the interests of the main actors in this process, i.e. local communities, with plans being made for the compulsory amalgamations of local communities that have not yet consolidated
To cherish the achievements of the decentralization reform, in particular the trust from the local business, now the most important on the agenda is to maintain the independence of the ATCs from the newly formed rayon administration and leave the money to local communities, at the grass-roots level.
If part of the ATC income, which has been preserved and spent locally for 4-5 years, is taken away in favor of the rayon budget by a directive order, this will lead to a loss of trust from local businesses, and their willingness to pay taxes in benefit of their community will decrease. This is why all 60% of PIT and other taxes paid according to the Budget Code must remain in ATC’s budgets.
Read the full research here.
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