Fiscal Decentralization And Its Impact On The Local Budget: The Case Of Albania

Decentralization requires the redistribution of financial resources to enable the exercise of functions and powers transferred to local government. This study analyzes fiscal decentralization in Albania, focusing on local autonomy in the collection and administration of local taxes. This paper analyzes fiscal decentralization over various periods, including both pre- and post-administrative-territorial reform, with a primary focus on developments in recent years. It highlights the commencement of a major reform affecting local budgets, such as the implementation of property tax. This analysis aims to evaluate the impact of fiscal decentralization on local budgets and its varying effects across municipalities with different fiscal capacities. It also reviews the decentralization reforms in Albania, especially post-administrative-territorial reform, and analyzes the evolving dynamics between central and local governments since the 2014 implementation of the reform. The analysis, conducted using statistical and comparative methods, reveals that while the own-source revenues of local governments have increased, there has also been a parallel rise in transfers and grants provided by the central government. The growth in own revenues has been most present in the Municipality of Tirana and other large municipalities located in regional centers, whereas smaller and medium-sized municipalities, which have a typically weaker fiscal capacity, have experienced less increases. Based on these findings, it is recommended that future policy reviews focus on potential adjustments to the local tax system, with specific emphasis on deepening and consolidating the property tax reform, as well as enhancing the efficiency of local tax and fee collection and administration. Moreover, improvements to the intergovernmental transfer system are recommended. Particularly, the fiscal equalization component within the unconditional transfer formula should be increased to provide greater financial support to local government units with limited fiscal capacities. This would help ensure that all municipalities are able to fulfill the functions assigned to them under the Law on Local Self-Government.