Клуб Икономика 2000
Transforming Ideas into Actions, Actions into Success

Prof. Stefan Ivanov, „Mechanism to Reconcile Inter-municipal Financial Disparities”



The currently envisioned countervailable subsidy provides resources to all municipalities – rich and poor alike. It distributes the resources on the basis of the tax capacity and of the domestic expenditures, without looking for any relation between them. Some of the resources are also used for various compensations that have nothing to do with the shortage of resources. All these facts decrease its countervailable effect and contradict the justice principle. 


The goal of the study is to recommend a mechanism, which, to a larger extend, meets the actual financial needs of the municipalities. For that purpose, the inter-municipal financial disparities are analyzed as well as the practice of implementation of countervailable mechanisms in the country since 1993.


The study recommends a mechanism for distribution, which focuses on the resource deficit, generated by the difference between the expenditure needs and the revenue capacity of each municipality. The revenue capacity is calculated on the basis of the revenue from transaction and property taxes. These revenues are re-calculated via their proportion to the voted tax rate to the highest one, separately for each tax. The expenditure needs are determined by 5 indicators, with the following relative weights:


Population number - 60%;

Population up to 14 years of age - 15%;

Population above 65 years of age - 5%;

Territory - 10%;

Number of settlements - 60.


Two approaches have been used as a means to compare the revenue capacity with the expenditure needs. The first one is based on the rule that the expenditure needs are equal to the revenue capacity plus the countervailable subsidy. Under the second approach, the structure of the expenditure needs is compared to the one of the revenue capacity. The first approach has a more limited countervailable effect and denies access to fewer municipalities. In comparison, the second approach, to a larger extend, distributes resources from rich to poor municipalities.