IMPACT ON VAT AT LOCAL FINANCES IN CORRELATION WITH NEW REFORMS:CASE STUDY - REPUBLIC OF NORTH MACEDONIA
IMPACT ON VAT AT LOCAL FINANCES IN CORRELATION WITH NEW REFORMS:CASE STUDY - REPUBLIC OF NORTH MACEDONIA

Summary/Abstract: The paper studies the relations of new reforms that have been introduced to support the fiscal capacity of the municipalities in North Macedonia. These reforms involve the transfer of VAT through new formula, offering positive benefits to enhance performance and supporting fiscal equalization to improve local finances.Fiscal equalization is necessary to address horizontal imbalances. Horizontal imbalances occur when the spatial distribution of local revenue sources does not align with spatial distribution of local government expenditures. National governments attempt to mitigate horizontal imbalances both on the grounds of social solidarity and economic efficiency, aiming to prevent fiscally induced misallocation of economic resources. In relation to expenditure needs, economic efficiency concerns situation where benefits from local services vary across different population strata rather than being uniform for all local residents. In this case, an efficiency-inducing grant formula should consider the differences in the proportion of entitled population in various localities. In this study we conduct empiric analyses (focused only on the VAT grant) to examine the correlation between higher performance, higher VAT transfers for municipalities in the country, and the implementation of two new funds in the formula linked to higher collected own revenues and better realized budgets compared to planned figures. Additionally, we will use the Pearson Correlation Coefficients to see did increasing the VAT subsidy rate lead to improve the fiscal capacity and increase the revenues of the municipalities.

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