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Local Government Finances to Gain Predictability and Autonomy: New Regulations Expected in 2025

LAWLocal Government Finances to Gain Predictability and Autonomy: New Regulations Expected in 2025

Work on amending the law on the revenues of local government units is accelerating. The new regulations are expected to come into effect at the beginning of 2025.

The Ministry of Finance is finalizing work on new regulations concerning the financing of local government units. After pre-consultations with the local government side, work on the bill will soon be included in the government’s agenda. “We are doing everything to ensure that the regulations come into force at the beginning of next year,” says Hanna Majszczyk, Undersecretary of State in the Ministry of Finance. The reform is necessary because the financial situation of local governments has significantly worsened in recent years, mainly due to unfavorable tax changes. While in 2018 only 2% of local government units predicted an operational deficit, by 2023 this had increased to more than half.

“We have prepared the framework for the changes in the law on the revenues of local government units. We have finished pre-consultations with the local government side, and now, based on these, we will prepare the draft. We are currently in the process of entering the government’s work agenda with the draft law,” says Hanna Majszczyk to Newseria Biznes agency.

Finance Minister Andrzej Domański indicated that the draft new regulations on the financing of local government units could be put up for public consultation as early as July this year. The reform aims to provide local governments with greater autonomy and predictability of revenues, which will be closely tied to the earnings of the residents of the respective local government units. Currently, the income of local government units from CIT and PIT is calculated from the due tax.

“The main goal behind creating these regulations is to disconnect the financing rules of local government units from systemic changes at the parliamentary level, so that changes in tax laws do not directly affect the revenues of local government units,” explains the Undersecretary of State at the Ministry of Finance.

Currently, municipalities’ share of personal income tax revenues is 38.46% (the remaining part goes to the central budget). According to preliminary indicators presented in May, the share in the PIT income of taxpayers residing in the area of a given local government unit will be 6.5% for municipalities, 1.6% for counties, 8% for cities with county rights, and 0.145% for provinces. The share in the CIT income of taxpayers headquartered in the local government unit area will be 1.2% for municipalities, 1.35% for counties, 1.32% for cities with county rights, and 2.58% for provinces. These shares are much lower than the current ones, but the base from which they will be calculated will be significantly higher (taxpayers’ income vs. due taxes).

The Ministry assures that after implementing these changes, local government revenues will significantly increase – the new method of calculating shares in PIT is expected to bring in 156 billion PLN next year, compared to 85 billion PLN under the current rules.

“We hope and are doing everything to ensure that the regulations come into force at the beginning of next year. That is our goal, and we will strive to achieve it. We have support from the local government side,” emphasizes Hanna Majszczyk.

Local government officials eagerly await the new regulations due to the worsening financial situation of many local governments. According to the Supreme Audit Office, the financial and systemic position of local governments has been seriously undermined by the tax reforms carried out from 2019 to 2022. Lowering tax rates, introducing exemptions for young taxpayers, or raising the tax-free allowance and the first tax threshold significantly reduced the own revenues of local government units, calling into question their financial independence and ability to carry out public tasks.

“The financial condition of local government budgets varies depending on the units. Local governments mostly complain about current revenues not covering current expenses. Certainly, the stability and quality of local government financing have deteriorated in recent years, especially concerning predictability in planning. Multi-year financial plans of local governments have ceased to be realistic,” explains the representative of the Ministry of Finance.

In a letter to the Minister of Finance, the Association of Polish Cities notes that the devastated system of local government revenues, particularly in cities, was partially “repaired” in 2024 by a significant increase in lump-sum PIT shares, which doubled compared to the previous government’s plan, an increase in the amount of the general educational subsidy, and the restoration of the development subsidy in its basic dimension. However, as indicated in the Ministry of Finance’s multi-year financial plans for local government units published in February this year, the financial condition of local government units remains critical. PIT revenues, despite significant increases, are still nearly 22 billion PLN below the trend line, assuming a constant annual percentage increase. In 2024, they would reach 70.9 billion PLN compared to the 91.9 billion PLN assumed by the exponential line. In 2023, the shortfall was almost 33 billion PLN. The Association also points out that the increase in the school subsidy will only suffice (and not everywhere) for the promised teacher salary increases. The financial gap in education has decreased from 42 billion PLN in 2023 to 38.2 billion PLN this year, but the difference between the amount of the school subsidy and current education expenses remains vast.

According to the March report by the Supreme Audit Office, the percentage of local governments showing an operational deficit in their budget resolutions increased with successive changes in the tax system. While in 2018 only 57 local government units (2% of all local governments) forecasted an operational deficit, by 2023 over 1,600 units (more than 57% of all local governments) had taken this step.

During the Nationwide BGK Conference for Local Government Units, local government representatives emphasized that they are demanding 10 billion PLN in support this year. Only such an amount will allow them to think about closing budgets and any investments.

“This year, the development subsidy was unfrozen, which according to the original budget bill for 2024 was not supposed to function. Over 3 billion PLN was allocated to local governments. Additionally, more than 2 billion PLN went to salaries for preschool employees and preschool teachers. Moreover, from July, government programs will be launched, under which social workers will receive motivational bonuses of 1,000 PLN gross,” enumerates Hanna Majszczyk.

Asked about the impact of the new regulations on the budget, the Deputy Finance Minister said that it will be known after the budget work for 2025 is completed.

“This will take place now at the turn of July and August,” she emphasizes.

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