No. 5




The need for reform in local government funding

14 June 2002


RiTo No. 5, 2002

  • Olev Raju

    University of Tartu, Chair of Economic Theory, professor

The present local government funding system is becoming obsolete. The great differences in income levels and the inexorable growth of the tax-free minimum make rapid and cardinal reform of the system necessary.

Estonia has unconditionally ratified the European charter of local governments, according to which local governments must have sufficient sources of income independent of the central government. There are two methods of covering local government expenditures in use in Europe – taxing corporate income and real estate. Neither is feasible in Estonia. The situation will not change by decreasing the number of municipal units. Estonia needs to immediately establish a stable system of funding municipalities, without any intermediate steps. In this so-called transition period we will have to make do with modifications to the present system. The main elements of such a system are described. On the agenda as well is matching of the principles of income and expenditure. The local government tax is compatible with additional funding of the expenditure base.

Full article in Estonian