ISP Working Paper Number 06-19

Intergovernmental Fiscal Relations in Romania: Challenges and Options for Reform

Jorge Martinez-Vazquez, Cristian Sepúlveda, Gabriel Leonardo, and Benjamin Miller, June 2006

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Abstract:

Since the early 1990s the decentralization of the public sector has been an important policy initiative in the process of transition to a market economy and a democratic society in Romania, but still the system of intergovernmental fiscal relations remains quite centralized. The efforts made in order to develop a legal framework have not been matched by the achievements reached in practice by the decentralization process, and the remaining problems suggest the lack of an integrated vision on the formulation of the decentralization strategy. This paper analyzes the administrative arrangements of the Romanian system as well as the several dimensions of its fiscal decentralization process, including expenditure and revenue assignments, intergovernmental transfers, borrowing, local budgeting and fiscal accountability issues. Based on the economic principles justifying a fiscally decentralized system of government, the paper identifies the main shortcomings of the current system and provides feasible options for reform. The challenges of joining the EU for the intergovernmental fiscal relations are also addressed. Finally, the priorities for immediate reforms are identified.