Billions of million plus cities. Where do the biggest cities get their money and what do they buy

03 August 2021
Billions of million plus cities. Where do the biggest cities get their money and what do they buy
Home > Analysis > Billions of million plus cities. Where do the biggest cities get their money and what do they buy

By Mariia Ocheretiana and Andrii Karpenko, for Ekonomichna Pravda (Economic Truth)

The quality of life in the regions is the responsibility of local authorities. Funding of million plus cities is ample, so all you need to do is to control how they spend it.

When thinking about the problems of their cities, people often grumble about state authorities. However, the central government is almost never the one guilty of potholed roads, antiquated medical equipment, or poor garbage collection.

It is within the authority of the governments of territorial communities (TCs) to deal with these problems. Thanks to the decentralization, local councils have enough powers and funding to do that. We talk here about dozens of billions of hryvnias that are now at the disposal of local communities. For example, Odesa this year will spend ₴11 bln, the capital of Ukraine — ₴60 bln.

Where does this money come from, how diligent are local councils of million plus cities in their work, and how do the biggest Ukrainian cities spend their billions? Via Open Budget, we gathered data necessary for answering these questions.

Where the money comes from

Thanks to fiscal decentralization, community budgets now receive revenue from state taxes, in particular, from income tax.

By default, income tax rate is 18% (also 0%, 5%, or 9% for special cases). Taxation applies to salaries, incomes of private entrepreneurs, and income from land leasing. The government budget gets 25% of income tax, local budgets — 75%. In 2020, the share of local budgets was ₴177.7 bln.

Local authorities have full control over this money. Mayor, local council, and its executive committee can spend budget money at their discretion.

In the first quarter of 2021, the share of income tax in the total budgets of million plus cities was at least 40%. The smallest share of income tax had Kyiv (41.28%) while in Odesa income tax brought almost half of the city’s revenue.

The second most important source of income is single tax payers. In the first quarter, Kyiv, Kharkiv, and Odesa got 15-19% of their revenue from them.

Single tax is paid by business entities that work under the simplified taxation system, it is the most common system for private entrepreneurs. In 2020, revenue from the single tax amounted to ₴37.9 bln.

The share of the single tax in the budget of Dnipro is 14.7%. A little bit more the city gets from property tax. Property tax is set by local authorities. The smallest share of property tax has Odesa — near 10%.

Also, budgets of million plus cities get significant revenue from the excise tax on alcohol, tobacco, and fuel. For Kyiv, though, its share is less important. The capital is more dependent on company income tax — another tax that before decentralization was paid only to the government budget.

By different degrees, budgets of million plus cities depend on interbudgetary transfers, i.e. on subventions and allowances. These payments Kyiv gets from the state while other million plus cities — from the state or their oblasts.

The smallest share of government subventions is in the budget of the capital (9.58%), the largest — in the budget of Odesa (14.26%). Subventions are allocated for local communities to meet some particular needs, for example, to pay the teachers. The smaller is the share of such funding, the more financially independent is the community.

To get more revenue, local communities are allowed to propose incentives and special benefits to their local businesses. Since businesses pay taxes and create jobs, the revenue of local budgets can be significantly increased this way. Does this mean that the secret of a comfortable life in the communities is just to have enough money? No.

Looking for balance

To solve the problems of their communities and make it comfortable to live there, local authorities have to spend their money wisely.

The first rule is to balance revenue and spendings. If a community spends more than it gets, it will quickly end up in debts and will have to borrow even more from neighboring communities, oblast, or the state. It is no easy task to repay the debts and attend to the community’s needs at the same time.

In some communities, though, the revenue is significantly larger than expenditures. It is also a bad sign for the authorities. It means that they have failed to improve the conditions in the community. According to plans for 2021, optimal budgetary planning has Kharkiv: expected revenue of the community is larger than expected spendings only by 1.1%. A proper balance between income and expenditures also has Kyiv: 4.5%.

Odesa will have a surplus of 8.6%. Dnipro, on the other hand, risks going into debt in 2021: according to the budgetary plan, the community will have an overdraft of 13.2%, i.e. of over ₴2 bln.

How money is spent

If the revenue of the community has increased but its inhabitants do not feel any positive changes, then probably local authorities use the money for some other needs or are just unable to spend their funding properly. How money is spent we can find out from local budgets.

All million plus cities spend the biggest share of their funding on education. Kyiv, for example, spent on education almost half of its budget in the first quarter, Kharkiv and Odesa — near 40%, Dnipro — only 35% but the issue is still its priority.

Such large shares allocated for education can be explained by the fact that communities use money provided by the government budget. However, subventions cover only salaries. Local authorities can use their own funds for additional payments to educators, repairs and construction of schools, new equipment, etc.

The situation is quite different for healthcare: this issue is a priority only for Kyiv. In the first quarter of 2021, the city council allocates near 8% of its funding for medical services. There is an explanation for this.

Since the National Healthcare Service pays for medical services directly to hospitals, this money does not go through local budgets. Local governments have other responsibilities concerning the issue: provide medical equipment, ensure hospitals’ renovation, buy ambulances, etc.

Kyiv, for example, planned to buy 20 ambulances in 2020. According to the report, however, the necessary funding was never allocated.

Roads and transport infrastructure is a priority for all million plus cities. Communities allocate from 7-8% (Dnipro and Odesa) to 15-16% (Kharkiv and Kyiv) for transport infrastructure. There is an important detail here, though: not all roads on the territory of the community are the responsibility of local authorities. Roads of a raion, oblast, and state importance should be maintained by raion, oblast, and state respectively.

Housing and public utilities also have a significant share in all big cities except the capital. Dnipro, Odesa, and Kharkiv allocate from 9% to 12% of their budgets to address the issue. This funding is spent on the installation of streetlights, street cleaning, garbage collection, housing repairs, and high-quality water supply.

For example, inhabitants of former village Chapli (now a district of Dnipro) for over 20 years suffer from water shortage. Some of its streets still do not have water supply pipes.

Locals complain that even their streams and wells have dried out. To solve the problem, the local council of the Dnipro community has organized transportation of drinking water twice a week and spent on that near 500 thousand in 2020.

In 2021, only Kyiv and Kharkiv councils allocated money for social security. In the first quarter, the communities spent 7.81% and 2.9% respectively. Funding was provided for assistance for vulnerable social groups, travel privileges, and food for schoolchildren from large families.

Kyiv plans to allocate the biggest share on social security in comparison to other oblast centers.

Million plus cities allocated from 10% to 15% for the functioning of local self-governance bodies. This money, in particular, will be spent on the needs of local councils and salaries for its executive committees. All four communities spend on this issue more money than, for example, on housing and public utilities.

Only Odesa and Dnipro made a priority of urban and regional development. That covers objects important for the community: kindergartens, schools, hospitals, nursing homes, and centers for people with special needs.

If the authorities allocate enough money for that, it can be a sign that they work for their communities not only on the eve of elections. Both communities allocated for urban and regional development 5-6% of their budgets: Odesa — ₴118 mln, Dnipro — near ₴142 mln.

Authorities continue to complain

Local councilors often insist that they cannot solve the problems of their communities since the state has not provided enough money. However, the central government is not responsible for all the issues anymore.

Even now almost half of the communities’ budgets come not from the state but from taxes paid by their citizens. Local governments have enough powers to repair schools and streetlights.

To know how your local government spends your money and to control it, it is necessary to look at budgets and budgetary plans. They are easily accessible via Open Budget (a tool provided by the Ministry of Finance) or websites of local councils.

To have your say in how budgets are planned and implemented, you can participate in public consultations, submit projects for participatory budgeting, sign petitions, organize street demonstrations, or inform the media. In other words, just be engaged.