Abstract
The chapter presents a short overview of the most relevant issues of local government's existence in the last 30 years in the Czech Republic. During this period, the Czech Republic has implemented reform of public administration in favour of greater decentralisation for local governments: increasing their responsibilities, creation of a new local government level-regions. The Czech Republic is one of the countries in the EU with the smallest average size of the municipality expressed in terms of population. This affects the pattern of local government financing and efficiency of local administration in general. The combination of small population size, small volume of the budget, lack of qualified staff, and incompetent decisions of the municipality representatives may lead to serious problems of indebtedness. To avoid this, central governments monitor municipal debt by various set of indicators. Case studies presented in the chapter indicate that even adequate regulations and monitoring mechanism do not ensure risk of municipal indebtedness.
TopIntroduction
The Czech Republic, like other Central and Eastern European countries, went through significant changes in the field of public administration and local government over the last thirty years. These changes were started in Czechoslovakia by the „Velvet revolution“ in December 1989, when the regime collapsed, including central planning. In central planning mode (before 1989), local governments in Czechoslovakia were largely just symbolic and did not have any scope of self-determination. All decisions impacting local government were taken centrally by the communist party and were implemented locally by central agents commissioned to perform state administration (Bryson, 2008). After 1989 local governments were again acquire with the providing independent public services. Since extreme centralization had been oppressive to the Czechs, the initial decentralization initiatives were bold (Bryson, 2008; Provazníková, 2015). Many municipalities, which until then had been forced to merge, became independent. The number of municipalities has doubled since 1990. While in 1989 there were 3,527 municipalities in the Czech Republic, at the beginning of 1994 there were 6,231 inhabitants. Today, the number of existing municipalities is very similar. Table 1 illustrates the distribution of municipality size in the Czech Republic until 2018. The high fragmentation of municipalities is obvious – 89% of municipalities consist of less than 2,000 inhabitants. Only 130 municipalities (2.1% of the total) are cities with 10,000 or more inhabitants, of which 51% of total population of the country (Czech Statistical Office, 2020). This categorization of municipalities is taken from the current model of financing the local governments. Specifically, it is used in the distribution of so-called shared taxes by the central government.
Table 1. Czech Republic Municipalities - Size Distribution to 31.12.2018 (Czech Statistical Office, 2020)
Size Groups of Municipalities
(Number of Inhabitants) | Number of Municipalities | In % | Number of Inhabitants | In % |
| Up to 199 | 1,423 | 22.7 | 177,752 | 1.7 |
| 200 - 499 | 1,997 | 31.9 | 655,673 | 6.2 |
| 500 - 999 | 1,366 | 21.8 | 966,997 | 9.1 |
| 1,000 - 1,999 | 769 | 12.3 | 1,072,002 | 10.1 |
| 2,000 - 4,999 | 426 | 6.8 | 1,280,006 | 12.0 |
| 5,000 - 9,999 | 147 | 2.3 | 1,001,254 | 9.4 |
| 10,000 - 19,999 | 69 | 1.1 | 977,836 | 9.2 |
| 20,000 - 49,999 | 43 | 0.7 | 1,293,656 | 12.1 |
| 50,000 - 99,999 | 12 | 0.2 | 868,774 | 8.2 |
| 100,000 - over | 6 | 0.1 | 2,355,850 | 22.1 |
| Total | 6,258 | 100.0 | 10,538,275 | 100.0 |
Key Terms in this Chapter
Bankruptcy: A court proceeding in which a judge and court trustee examine the assets and liabilities of individuals and businesses who can’t pay their bills and decide whether to discharge those debts, so they are no longer legally required to pay them.
Debt Control Monitoring: A set of rules and mechanisms to monitor and limit local government debt. They can take the form of fiscal rules, direct control from central government given by law or based on cooperative negotiation between the levels of government.
Municipal Revenues: Sources for financing municipal activities. They include taxes, charges and fees, revenues from property and other financial activities, subsidies and grants, loans and bonds issued.
Liabilities: Anything that the government owes to another subject. They represent the constraint on government fiscal activities. Liabilities are the source of assets.
Subsidy: A central government payment to encourage specific local government activities or expenditures or to pursue various policy objectives at the local level. They are usually earmarked - these funds must be used for a purpose (goods, property, service, program) decided by the relevant authority other than the government concerned.
Insolvency: A term for when an individual or organization can no longer meet its financial obligations to its lenders as debts become due. Before an insolvent company or person gets involved in insolvency proceedings, it will likely be involved in informal arrangements with creditors, such as setting up alternative payment arrangements. Insolvency can arise from poor cash management, a reduction in cash inflow, or an increase in expenses.
Municipal Expenditures: They consist of current and capital expenditure. Current expenditures are used for regularly repeated activities - i.e. salaries and wages of employees, administrative costs, rents, and expenditures on public services for inhabitants. Capital expenditure are dedicated for financing investment needs of municipality. They affect its potential for development and the range of services offered. It depends on the municipality’s revenues, reserves accumulated in the past (i.e. budget surplus), and the ability to increase revenues from external sources, in most cases through loans or credit.
Shared Taxes: National taxes (usually based on personal or corporate income taxes, VAT, excise taxes) which are redistributed to local governments according to allocation criteria which are defined by central government, with more or less possibility for local government intervene or negotiate. In the Czech Republic includes taxes of income and VAT.
Financial Capacity: The maximum revenue local government can raise in standard conditions which are set at the central level of government. Financial capacity largely depends on the tax (fiscal) capacity and non-fiscal resources (revenue from property, in particular land and buildings, economic activities, or financial investments).
Assets: Anything that the local government owns that can produce the economic benefit. They encompass, for example, capital infrastructure (long-term assets) and financial resources (short-term assets) as well.