A new analysis shows a strong correlation between municipal revenue and the level of services provided, said Foresight Center expert Märt Masso. "When a municipality's revenue per capita increases by 10 percent, the service level improves by about 4 percent. At the same time, this means that real additional sources of income are needed to raise the quality and accessibility of services — whether through a larger share of income tax or an increase in local taxes," Masso said in a press release.

According to the center, in 2023 the service level across 18 sectors among municipalities ranged from 1.8 to 5.87 on a 9-point scale, with an average score of just 4.02. Higher service levels were found in wealthier municipalities, meaning they were mostly linked to higher revenue per resident.

The analysis indicates that revenue growth at levels similar to previous years is not enough to significantly improve service quality — especially since municipalities are already using their resources efficiently. According to a Foresight Center forecast, municipal revenues are expected to grow by about 10 percent over the next two to three years. However, given municipalities' rising debt obligations, this growth rate will only deepen their financial difficulties.

To raise the service level by 4 percent, the income tax revenue of local governments would need to grow by approximately 1.2 times — for example, by raising their share of personal income tax from the current 71 percent to 83 percent. Alternatively, achieving the same result would require nearly a fivefold increase in revenue from local taxes.

"The future of municipal financing demands clear choices. Either increase municipalities' share of existing tax revenues or grant them greater authority to impose their own taxes. In either case, the impact of the tax burden on residents and businesses must be taken into account," Masso said. He added that, on a more optimistic note, investments in innovation could yield better returns, meaning each additional euro would contribute more to improving service levels than before.

The think tank also pointed out that understanding the link between municipal service levels and funding is becoming increasingly important. Improving the accessibility and quality of public services will require a strategic choice from the state: either expand the municipal revenue base to ensure better funding for existing tasks or reduce the volume of municipal responsibilities, focusing on raising the quality of services in the remaining areas.

The results of the analysis are outlined in the Foresight Center's short report, "Prospects for Strengthening the Municipal Revenue Base and Developing Services," which is part of the center's broader research initiative, "The Future of the Spatiotemporal Accessibility of Local Public Services." The aim of this initiative is to map the current and future accessibility of public services and identify the most suitable future models for service delivery.

The Foresight Center is a think tank operating under the Riigikogu that analyzes future societal and economic developments. It conducts research projects on various topics, aiming to examine long-term trends and identify emerging developments and directions.

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