Riga, Feb 26 (LETA) - The Ministry of Finance has submitted a draft bill on improvement of the local government financial equalization system to the government for consideration, the ministry informed LETA.

The new model provides for a number of systemic solutions, the ministry informed. Real estate tax revenues are excluded from the financial equalization calculation, leaving them entirely at the disposal of local governments, thus strengthening fiscal autonomy and the link between the tax payment and the development of a given territory. In the current model, the share of real estate tax revenues is around 8 percent of the estimated revenues of local governments.

A new financial equalization algorithm has also been developed which reduces the revenue disparities between municipalities and allows to move away from the current division into "donors" and "recipients", replacing it with a single, systemically understandable approach to the distribution of funding.

The proposed model also provides for a balanced distribution of personal income tax, with part of the revenue distributed on the basis of actual performance, and the other part included in the financial equalization core funding.

According to the ministry, this strengthens the overall objective of the equalization system - to ensure equal access to basic services for all citizens regardless of their place of residence.

The new model provides for a reduction of administrative burden.

During the drafting process, negotiations have been held with the Ministry of Smart Administration and Regional Development, the Latvian Association of Local Governments, the Latvian Association of Large Cities, the Association of Regional Development Centers, the Latgale Planning Region, and the Riga and Pieriga association of local governments Riga Metropolis, assessing the proposals and current financial data provided by the local governments.

According to the ministry, the majority of municipalities support the further progress of the draft law, positively assessing the changes in the financial equalization model. At the same time, there are municipalities, mainly Pieriga municipalities, which are opposed to the proposed changes and point to the need to increase state budget funding.

Analysis of international data shows that the revenue and expenditure indicators of Latvian local governments in relation to gross domestic product are in line with the European Union (EU) average and exceed those of the Baltic countries with similar functions, the ministry notes.

Therefore, according to the ministry, the improvement of the system is primarily a structural modernization to ensure fairer and more predictable distribution. However, the question of the amount of additional funding for financial equalization should be addressed in the process of preparing the state budget, by assessing the overall fiscal space and the dynamics of expenditure at all levels of government.

The draft law provides for additional funding to support municipalities whose revenue per unit of equalization of municipal finances is lower than the average revenue per unit of equalization. The minsitry explains that its main objective is to reduce socio-economic disparities between territories and to ensure balanced development and access to services.

Finance Minister Arvils Aseradens (New Unity) pointed out that the new financial equalization model is based on both current statistics and a multi-year analysis of trends in municipal revenue and expenditure. The aim of the model is to ensure a fairer, more transparent and predictable distribution of financial resources, allowing municipalities to perform their statutory functions equally, regardless of their fiscal capacity and socio-economic disparities.