Municipal Expenditure

​The expenditure of a municipality significantly affects its potential for development and the range of services offered. It depends on the municipality’s income, reserves accumulated in the past (i.e. budget surplus), and the ability to increase income from external sources, in most cases through loans or credit.
There are two important aspects to municipal expenditure; the total amount and its allocation. To some extent the general structure of municipal expenditure reflects the preferences of inhabitants living in the area in question, as well as the priorities of the local government. This article describes the structural differences in municipal expenditure (excluding Prague) and changes within the period of 2004 to 2007 for individual regions. 

The usefulness of such reports is supported by the recommendation Rec(2004) of the Committee of Ministers to member states concerning financial and budgetary management at local and regional levels. Among other things, it mentions the fact that central government should implement statistical and comparative analyses of municipal expenditure. The purpose of this is to identify anomalies in expenditure trends within a municipality or group of municipalities in a timely manner, and to trigger corrective processes. It is always better to prevent possible problems rather than solving them at a later date, which might prove to be quite expensive in many cases. This comparison of individual municipalities should be available to the public including explanations of the indicators used. Such reports usually increase the interest of inhabitants in the use of public funds within the community, and strengthen the relationship between the preferences of inhabitants and priorities of local government.
The Czech Ministry of Finance regularly publishes detailed data on the management of individual municipalities. This information forms the basis of the analysis discussed below. This is, of course, just the first step in the implementation of the above-mentioned recommendation for a widely available comparison of municipal budgets and performance. 

The structure of spending in a particular municipality is, to some extent, determined by past development, the priorities of elected representatives, and the economic strength of the municipality. The size of the municipality also plays an important role; the bigger the municipality, the higher the budget (this not only applies in absolute terms, but in most cases also per capita). Therefore the expenditure structure is, or may be, quite variable. Based on the data made publicly available by the Ministry of Finance, individual municipalities or groups of municipalities can be compared. However, this is not the subject of the current article but rather the comparison of municipalities between individual regions.  

Structure of municipal expenditure
Municipal expenditure decreased by nearly 10% between 2004 and 2007. This decrease was mainly due to the introduction of administrative measures, such as a different mechanism for reporting the contributions to primary and secondary school students. Up to and including 2004, these funds appeared in the municipality budgets. However, since then the schools themselves have been reporting them. This fact in itself substantially distorts the trends in municipal expenditure over time. It is possible to find other similar examples. 

Trends in individual expenditure items were not uniform. Within the period in question, the increase in social affairs expenditure was the greatest (28%), compared to the surprising increase in spending on representatives  (24%), public transport (22%), and public order and safety (21%). 

The largest proportion of the total expenditure of all municipalities was spent on Public Services. This includes spending on education, housing, municipal services, environmental protection, physical education, health, etc. This share of the expenditure dropped by 5 percentage points to less than 41% in the period in question. The largest part of this drop was due to the decrease in the reported expenditure on education. On the contrary, for the second highest item – expenditure on general public administration (where the expenditure on local governments and representatives  accounts for almost three quarters of the total) - the proportion increased by 4 percentage points between 2004 and 2007. 

In terms of total expenditure, the third highest item of expenditure was industry and other sectors (about 19%), which includes the management, maintenance and construction of roads, sewage treatment and public transport subsidies and operations. There was also an increase of 4 percentage points in this sector. The share of spending on social affairs also increased (to almost 14% in 2007, while in 2004 it was less than 10%). This fact also relates to the change in payments of various social benefits. Expenditure on public safety (public law and order and fire protection) represented less than 2.5% of the total. The lowest expenditure was on agriculture and forestry (less than 1%).

Table 1 shows expenditure on individual services in terms of the average values in the period from 2004 to 2007, broken down into total, current and capital expenditure. It is interesting that almost 90% of the capital expenditure was spent in only two sectors; public services (particularly housing, municipal services (which include public lighting, local heating and gas supply) and education) and industry and other sectors (in particular road maintenance and sewage treatment plant).
Within the framework of current expenditure, the largest portion allocated to individual services (nearly 19%) is spent on local governments, followed by social affairs (15%), and education (less than 14%). Environmental protection current expenditure (7%) is also significant, 60% of which is associated with waste management. Three-quarters of the current expenditure on industry and other sectors is spent on road management and maintenance, public transport subsidies and operations.

Between 2004 and 2007 the share of capital expenditure spent on culture decreased (from 2.2% to 1.6%) and that spent on physical education increased (from 8.5% to 10.4%). The proportion of expenditure on housing and municipal services, social affairs and environmental protection decreased, while the percentage spent on waste management remained virtually unchanged. Expenditure on public safety (in particular fire protection) increased slightly but the expenditure on road management, maintenance and construction increased by nearly 3 percentage points.
Education expenditure expressed as a percentage of the total expenditure within the period in question significantly decreased, which in turn significantly affected the distribution of all other areas of expenditure, which increased for practically all other sectors. The largest increase was observed in social affairs expenditure (6 percentage points), followed by general public administration (with an increase of nearly 6 percentage points), industry and other sectors (nearly 3 percentage points) and environmental protection (2 percentage points).

Expenditure of municipalities by region
What do the percentages of municipality current expenditure look like from a regional point of view? At first glance, it is clear that there are significant variations in the structure of municipality current expenditure in individual regions compared to the average (again, excluding Prague). The differences may be the result of the difference in municipality sizes within the regions.

The average share of current expenditure (average for all municipalities for the years 2004 to 2007) spent on local government is, as already mentioned, less than 19% of the total current expenditure. Municipalities in Central Bohemia allocated up to 23% of the total current expenditure to this sector, while the Moravian-Silesian Region spent only 16%. Municipalities in the Liberec Region spent 15.5% of their current expenditure on education (pre-school facilities, primary and secondary schools and other educational establishments), whereas municipalities in the South-Moravian Region spent only 11.5% (the average value was 13.5%). As for the share of current expenditure allocated to industry and other sectors (average 11.2%), the highest was in the municipalities of the Pilsner Region (16%), and the lowest was in the municipalities of the Karlovy Vary Region (8.7%).

The municipalities of Southern Moravia spent 4% of their budgets on cultural activities, while for the same item Central Bohemia spent just 2.7% (the average being 3.7%). The highest proportion of spending on housing was nearly 8% in the municipalities of the Karlovy Vary Region, whereas the municipalities in the Pardubice Region spent only 3.5% (average of 5%). Municipal services accounted for the largest share in Central Bohemia (7%), whereas the smallest share of 3.9% was spent in the Moravian-Silesian Region (average of 5.4%).

The municipalities of the Hradec Králové Region spent the highest proportion of their budgets (4.0% - the highest percentage of all the regions) on physical education and sports activities. The Pilsner Region came last in this respect with only 2.1%, while the average value was 2.9%. Concerning the expenditure on environmental protection and its most significant component, waste management, there was little deviation from the average among the regions. Small deviations were observed among the municipal current expenditure on public safety (which includes fire protection).

Capital expenditure
In the case of capital expenditure, the percentages spent on individual sectors are different from current expenditure, and deviations from the average value for individual regions are greater. Looking at a few major services, it can be seen that spending on sewage treatment was very important for the municipalities of Central Bohemia, constituting almost a quarter of their total capital spending, while the municipalities of the Liberec Region spent less than 5% (the average was 14.5%). Another important item of capital expenditure was municipal services, with an average of 12.6%. Above-average expenditure was seen in the municipalities of the Central Bohemian Region (almost 16% of the capital budget), whereas spending was below-average  in the municipalities of the Olomouc Region (8%).

In addition, housing development was a significant municipal capital budget item. The average value of 11.6% was exceeded by municipalities in the Pardubice Region (almost 19%), and was below-average for the municipalities in the Olomouc and Moravian-Silesian Regions (both 8.7%). The average capital expenditure on education was 8.3% with the highest share of the total capital expenditure spent by the municipalities in the Zlín region (13.7%), while the South-Bohemian municipalities had the lowest percentage spending of 6%.

Expenditure per capita
Taking a look at the level of expenditure per capita, municipalities in the Moravian-Silesian Region showed the highest average current expenditure per capita in 2004 to 2007 (16 239 CZK), which is 16% more than the average for all other municipalities (data excludes Prague). In comparison, the Central Bohemian municipalities spent only 12 702 CZK, which is 10% less than the average.

On average, municipalities had a current expenditure of 2 632 CZK per capita for local administration. Variations in this item between the different regions were very small and ranged from 2 446 CZK in the Hradec Králové Region to 2 882 CZK in the Central Bohemian Region. On the other hand, some significant differences can be seen in current expenditure in social affairs. The average per capita value of 2 116 CZK was significantly exceeded by municipalities in the Moravian-Silesian Region (3 184 CZK), while municipalities in the Central Bohemian region spent much less (1 396 CZK). The average current expenditure spent on culture was 518 CZK. The South-Moravian municipalities exceeded the average by more than 200 CZK (752 CZK), while municipalities in the Vysocina Region spent more than CZK 200 below the average (298 CZK).

Health care (outpatient and inpatient care) also showed substantial differences in the amount of current expenditure per capita. With an average of 114 CZK / capita, spending ranged from a maximum of 192 CZK in the Moravian-Silesian Region to 29 CZK in the Olomouc Region. The situation for public transport subsidies is similar. Municipalities in the Moravian-Silesian Region spent more than twice the average (941 CZK per capita), while municipalities in the Pilsner Region spent only 69 CZK per capita.

In the area of capital expenditure, the situation is as follows. Municipalities spent on average 706 CZK per capita on housing development.  In the Pilsner and Pardubice Regions municipalities spent more than 1 000 CZK per capita on housing, while municipalities of the Hradec Kralove Region spent just 502 CZK. Municipalities in the Central Bohemian Region spent the highest on municipal services (1 033 CZK), while municipalities in the Karlovy Vary Region spent just 483 CZK, the average being 775 CZK per capita.

Road construction costs were 1 452 CZK per capita in the Pilsner Region, which is nearly three times more than what was spent by municipalities in the Liberec Region; the average value was 894 CZK per capita. Investment in wastewater treatment plants by the Central Bohemian municipalities was 1 557 CZK per capita, while municipalities in the Ústí nad Labem Region spent only about one-third of this amount. The highest capital expenditure on education was in the Zlín Region (793 CZK per capita) and the lowest was in the Ústí nad Labem Region (293 CZK per capita), the average being 512 CZK per capita.

Trends in municipal expenditure by region
Table 2 shows an overview of the rate of increase in current expenditure on individual services by region.

As mentioned earlier, current expenditure decreased in the period from 2004 to 2007. The decrease was 9.3% in total for all municipalities (excluding Prague). The highest reduction occurred in the municipalities of the Karlovy Vary Region, whereas the lowest decrease was reported in the Pilsner Region. Surprisingly, both regions are characterized by relatively high per capita current expenditure in comparison with other regions, occupying third and fourth positions (average over the last four years).

Among the services examined, social affairs showed the highest growth rate, which was more than a third for all municipalities. This expenditure increased in all regions, to differing extents, with the exception of the municipalities in the Ústí nad Labem Region (where it decreased by almost 4%). However, this is also the region in which the municipalities showed the second highest level of current expenditure per capita on social affairs. The highest growth occurred in the Central Bohemian Region, where there was an increase of 82%.

As already mentioned, the Ústí nad Labem Region is the only region where there was a decline in the current expenditure on social affairs within the years 2004 to 2007. In absolute terms, this reduction amounted to 101 million CZK, while only in Most itself this decrease amounted to  140 million CZK. This decrease was not seen in all municipalities in the region. Teplice, for example, showed a 50% increase. However, in general, these costs declined sharply in municipalities of up to 20 000 inhabitants, despite the fact that  the municipalities with more than 20 000 inhabitants represented almost two thirds of all municipal expenditure in the region in 2007.  

Current expenditure on waste management was also a high-growth item. It increased by almost 40% in municipalities of the Pardubice Region (which have quite a low absolute per capita expenditure), and by just 9% in the Pilsner Region, which showed an even lower per capita expenditure. We can find highly differentiated trends in physical education expenditure. While the average for all municipalities amounts to almost 30%, expenditure in the Hradec Králové Region (where there is a high per capita expenditure on this service) increased by nearly 67%, whereas the municipalities in the Karlovy Vary Region showed a decrease of 2%.

Current expenditure on municipal services increased significantly in the municipalities of the Ústí nad Labem Region (by 44%). This region also had relatively high per capita spending. The growth was significantly slower in the South-Bohemian municipalities (less than 4%), while the average was 24%. Expenditure on local government increased by almost a quarter within this period, most of all in the Karlovy Vary Region (28%), whereas the lowest growth was in the Zlín Region (20%). Expenditure on public order and safety increased by more than 20%. It increased by nearly 36% in the Pardubice Region which had slightly lower expenditure per capita, whereas the Ústí nad Labem Region showed a reduction (by more than 2%), although the municipalities in this region showed a relatively high per capita expenditure.

Even this very brief overview of the individual expenditure items in the municipal budgets shows that the same few regions quite often have the extreme values (maximum or minimum). Municipal government has already existed for almost two decades, so the influence of different starting conditions in different regions has gradually been reduced. What has not changed, however, are the differences between regions in terms of the municipality size distribution.

The expenditure structure of small and large municipalities is different. The fact that a region has a high number of small municipalities is undoubtedly reflected in the total municipality expenditure. Given the parameters of the municipal budget revenue  in the Czech Republic, it can be assumed that the size structure of municipalities in the region has a greater impact on the overall structure of municipal spending than individual municipalities. Regional government policy may also influence the differences in expenditure structure in individual areas.
Věra Kameníčková CCB – Czech Credit Bureau, Ondřej Pirohanič, CCB – Czech Credit Bureau
August 2008.