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Madis Kallas: Changes to local government funding system cannot wait

Madis Kallas.
Madis Kallas. Source: Renee Altrov

The way local governments are funded should be based on fixed tax revenue as opposed to Estonia's equalization fund model. The former would guarantee stable income, growth and greater financial autonomy, Minister of Regional Affairs Madis Kallas writes.

The gap between how different local governments are doing in Estonia keeps widening. It is high time to rein in inequality as our country and its future are only as secure as our local governments. We are a small enough country to be able to function as a whole in almost all areas. That is why we must not set the city and the countryside in contrast. Almost all city-dwellers in Estonia can trace their roots back to a rural area, while everyone living in the country is somehow connected to cities.

I hail from Saaremaa, which gives me a unique perspective in the government as concerns regional concerns. Rural affairs and regional policy have been overshadowed by other topics over the last 30 years. Both the government and Riigikogu have seen plenty of representatives from different fields and regions in that time. I can assure you that both still have people who have stood up for smaller regions and the periphery and continue to do so, irrespective of their ideological convictions. But their voice has not been loud enough.

Estonia is home to roughly 1,360,000 people of whom 640,000 live in Harju County and 460,000 in Tallinn. People have been leaving the countryside for cities as it is easier to find a job, access public services and find a school or kindergarten there, not to mention shopping. There is no doubt that life is more comfortable in the city and one's needs are better catered to. But that does not mean we can ignore the fact that we have 730,000 people living outside Harju County.

As someone who comes from the countryside, so to speak, I have realized that life in Estonia is hevily urban-leaning. Problems discussed in the capital are rarely the same issues the rest of Estonia faces. It is high time we realized the severity of the distinction. The solutions can only be found together.

We depend on rural areas

I've heard people ask, when discussing life in the countryside: "But what if everyone moved to the city?" or "Who are we saving those faraway regions for?" Such treatments make me sad to say the least.

Life in the city very directly depends on life in the country. Our cities get their electricity and central heating from the countryside, we get our food from the countryside and part of our industry also lies outside major cities. It would be impossible to handle all of those things inside urban areas. Emptying rural areas are also a security risk. The more even the population structure and services, the better we can resist all manner of crises, domestic and foreign alike. Let us respect those who still live in rural areas.

Those who do usually know to expect the peculiarities of life outside major centers, whether we're talking about snowed-in roads, more frequent power outages, poor cellular signal or reduced availability of goods and services. It is clear that areas outside cities will never match the latter in terms of possibilities. But we need to ensure vital services and living conditions for everyone.

Cities have drawn away not just people and money but also smaller local government's ability to ensure high-quality services for remaining residents. Local governments' revenue comes from a share in income tax based on the number of working-age residents. A person works, pays taxes a part of which then reaches the local government where they live. The more working-age people move to cities, the smaller local government budgets become.

At the same time, those who stay in the countryside are increasingly elderly who also need services – safe and clear roads, electricity, public transport, medical assistance etc. Some regions can no longer ensure all of those services and a favorable living environment because they have too few people, while others cannot do it because they have too many.

To help the situation, we decided to give rural municipalities and cities a greater share of income tax revenue from pensions and a proportionally smaller share of income tax from working-age people from 2024. This will see local governments which find themselves in a difficult situation supported at the expense of more successful ones. Of course, everyone needs money to offer services and investments.

We are looking at difficult choices, but simply waiting for times to get better would only prepare ground for new crises needing even more expensive solutions.

More modern financing of local governments

The income tax changes of 2024 were just the first step and the problem will need to be addressed in more detail in the coming years. We must also offer additional motivation to local governments at the expense of which others are supported.

One such possibility is sending a part of physical person income tax revenue to local government budgets. This would allow local governments to generate revenue based on local jobs, boosting their motivation to find new ways to develop local business environment.

We are awaiting feedback from local leaders by the end of January. We also asked local governments what they think about harmonizing the income tax revenue shares from pensioners and working-age people and asked for proposals of reducing the total deficit of local governments.

Local government funding should be based primarily on fixed tax revenue, not the equalization fund. Tax revenue-based funding would ensure stable income for local governments, their growth and financial autonomy.

It is high time to introduce changes to how local governments are funded because they cannot be postponed any longer. Unfortunately, inequality has only grown and many people in Estonia have poorer access to services and fewer opportunities. Even though it is natural that larger cities and greater population density offer a wider range of opportunities, the rest of Estonia's residents should not be deprived of them. Life must be equally good everywhere in Estonia.


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Editor: Marcus Turovski

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