ESTONIA

The Republic of Estonia is a parliamentary democratic republic. Its legislative power is composed of a unicameral Parliament (Riigikogu), which is composed of 101 members who are directly elected for a four-year term according to the system of proportional representation. The president is elected by the Parliament of Estonia for a five-year term as head of state. Executive power is vested in the government, headed by a prime minister who is nominated by the president after being appointed by the parliament. Estonia is a unitary country with a single-tier of subnational government. The local government system is enshrined in Chapter 14 of the 1992 Estonian Constitution, entitled “Local Government”. Moreover, Article 2 of the Constitution states that “the division of territory into administrative units shall be provided by law”, and Art. 155 established rural municipalities and towns as the basic units of local government. Other units of local government may be formed on the basis of and pursuant to procedure provided by law. Estonia introduced online voting for its 2005 local elections and the system has been in place ever since.

Local authorities are represented by local councils, whose members are elected by direct local elections for a four-year term, according to the Municipal Council Election Act (2002). Members of the councils then elect a chairperson, and appoint a mayor, who is tasked with representing the local authority, as well as managing the municipal administration together with the chairperson. Decentralisation was re-established in Estonia in 1989 by the Local Government Act, which was followed by the 1993 Local Government Organisation Act, which abolished counties as a tier of local government (they became part of the State territorial administration). In 2015, the government started planning territorial reform promoting municipal mergers, which led to the adoption of the Administrative Reform Act in June 2016 and administrative reform in 2017.

TERRITORIAL ORGANISATION
MUNICIPAL LEVEL	INTERMEDIATE LEVEL	REGIONAL LEVEL	TOTAL NUMBER OF SNGs (2021)
79 municipalities (Vald, linn)			79
Average municipal size: 16 849 inhabitants
79			79

OVERALL DESCRIPTION: Estonia has a single tier of subnational government, currently comprising 79 municipalities. Among these 79 municipalities, 15 are urban (linnad) and 64 are rural (vallad), all with the same legal status.

MUNICIPAL LEVEL: The 2017 Administrative Reform Act introduced a minimum municipal population size of 5 000 inhabitants and 11 000 as the recommended size. The Act also set out the different stages and the timetable for implementing the reform. The administrative reform was carried out in 2017 and the new municipal structure was adopted at the beginning of 2018. The process was carried out in two stages: first, starting in 2016 until 1 January 2017 with voluntary mergers; then, the remaining received merger proposals from the government. The reform ended in October 2017 with the regular local council elections. Following this reform, the number of municipalities decreased from 213 to 79, and the median population of local governments increased from 1 887 to 7 739. The administrative reform also stripped the counties of most of their functions and reallocated their tasks to ministries and municipalities. The county borders are still used as a statistical unit.

The average municipal size is around 16 900 inhabitants, above the OECD average (10 250) and EU27 average (5 960). 68% of municipalities presently have between 5 000 and 20 000 inhabitants and 21.5% have fewer than 5 000 inhabitants. Municipalities have the legal possibility to create sub-municipal entities called districts (linnaosa) in cities and parishes (osavald) in rural municipalities. They have a limited self-governing status (own governing assembly) and depend on their municipality. However, it is optional and eight municipalities, including Tallinn, have opted for this status. There are two dominating city regions, whose populations are still projected to grow: the capital city area, with a population of 437 817, and the main university city area of Tartu, with a population of 95 190. Together these two cities form about 40% of the total population of Estonia (1 331 824 inhabitants in 2021).

HORIZONTAL COOPERATION: Intermunicipal cooperation is also encouraged through the 1993 Local Government Organisation Act, which defined a framework for voluntary inter-municipal bodies performing (non-mandatory) tasks on behalf of local authorities. Municipalities are currently mandated to cooperate in spatial planning and county development planning. In case of these services, the intermunicipal cooperation is typically organised within the borders of the 15 counties. Currently, there are 15 such cooperative units focusing on development planning. In addition, there are 13 municipal cooperative associations, which are formed for more general cooperation between member municipalities. There are also 11 cooperative transport centres, of which 9 are county-based and 2 are region-based.

There is no directly elected body for the cooperative bodies, instead the member municipalities appoint their representatives to the council. By law, the cooperative bodies must participate in the preparation of national spatial planning and be involved in the management of public transport in the county where necessary.

STATE TERRITORIAL ADMINISTRATION: Until 1 January 2018, the state territorial administration comprised 15 county governments, which were administrative subdivisions led by governors appointed by the central government. As a part of the administrative reform, county governments were abolished and their tasks were reorganised and transferred to either the central administration or municipalities and inter-municipal groupings. A new department of Regional Administration was established in the Ministry of Finance, which overtook part of the functions of county governments. The department has seven small sub-national agencies with 3-4 employees in each (instead of around 480 employees prior to 2018 reform).

Local government responsibilities are set by the Constitution, the Local Government Organisation Act of 1993 and specific laws (for example Social Welfare Act, Republic of Estonia Education Act, Basic Schools and Upper Secondary Schools Act, etc.). Municipal competences encompass the sectors of education, social welfare, housing and utilities, and local transport, etc. (see table below).

With the 2017 legislative amendments (in force since 1 January 2018), some competences of the county governments were redistributed among local councils for joint implementation, such as the organisation of public transport, land reform procedures, and composition of county development strategy. Ministries took the lead on the supervision in different sectors relating to educational institutions, land ownership and the cadastre, and setting up local development plans. In 2001, an important health reform led to the privatisation of health, which was previously a responsibility carried out by municipalities and central government. Through successive amendments to the Social Welfare Act (originally enacted in 1995), local governments have been given more flexibility in the provision of the subsistence benefit and care possibilities, and in organising the provision of high quality early childhood education based on the needs of families. Continuing decentralisation and responsibility devolvement to municipalities is an ongoing process following the 2017 administrative reform.

Local authorities may provide certain public services through the private sector. They may also establish agencies or joint agencies with other local authorities for the provision of services. They can also be a partner or shareholder in a company, create foundations or be a member of a non-profit association.

Main responsibility sectors and sub-sectors
SECTORS AND SUB-SECTORS	Municipal level
1. General public services (administration)	Issuance of building ordinances and permits
2. Public order and safety
3. Economic affairs / transports	Local public transportation; Construction and maintenance of local roads; planning, Ports (shared)
4. Environment protection	Waste management; Disaster management (shared)
5. Housing and community amenities	Water supply; Sewerage; Public lighting; Central heating and amenities; Spatial planning; Cemeteries; Housing and utilities
6. Health	Primary healthcare (shared)
7. Culture & Recreation	Cultural facilities; Youth work; Libraries; Community centres; Museums; Sports facilities
8. Education	Maintenance of pre-school child care institutions, Primary schools; Secondary schools (shared)
9. Social Welfare	Provision of social services; Social benefits grants and other social assistance; Welfare services for the elderly; Shelters and care homes; Nurseries; Social housing; Child protections; Services for disabled persons (shared)

Scope of fiscal data: local governments and organisations managed by local governments, local government foundations, local government hospitals, and local government enterprises.

SNA 2008

Availability of fiscal data: High

Quality/reliability of fiscal data: High

GENERAL INTRODUCTION: The basic legal provisions regarding local government financing are set by the Constitution (Art. 157), which states that local authorities have independent budgets and have the legal right to levy and collect taxes, and to impose duties. The major legal act in this regard is the 2010 Local Government Financial Management Act. Currently, local governments have very limited powers and incentives to increase their own revenues. As a result, local governments are overwhelmingly dependent on state grants and transfers. The state meets local governments at the annual Budget Negotiation Workgroup, established by the government and the delegation of the Association of Estonian Cities and Municipalities. The financial and tax policy workgroup, formed by the Ministry of Finance and local governments, is the forum during which the support allocated to local authorities, as well as their cost base and other matters concerning tax policy, are discussed.

Subnational government expenditure by economic classification
	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure	4048	10.7%	23.3%	100.0%
Inc. current expenditure	3265	8.6%	22.0%	80.7%
Compensation of employees	1955	5.2%	42.9%	48.3%
Intermediate consumption	973	2.6%	39.5%	24.0%
Social expenditure	145	0.4%	2.3%	3.6%
Subsidies and current transfers	188	0.5%	12.5%	4.6%
Financial charges	3	0.007%	18.4%	0.1%
Others	1	0.003%	4.5%	0.02%
Incl. capital expenditure	783	2.1%	30.6%	19.3%
Capital transfers	40	0.1%	12.0%	1.0%
Direct investment (or GFCF)	743	2.0%	33.3%	18.3%

EXPENDITURE: Municipalities in Estonia are responsible for 23.3% of government expenditure in 2019, representing 10.7% of GDP, relatively far below the OECD average (respectively 36.6% and 17.1%) but close to the OECD average for unitary countries (27.5% of public expenditure and 12.7% of GDP). An important part of local expenditure is financed via earmarked grants from the state budget, meaning that municipalities have very limited autonomy regarding the manner in which they perform their tasks. Current expenditures represented 80.7% of subnational expenditure. It was composed primarily of subnational staff expenditure, whose share in public staff spending is significant.

DIRECT INVESTMENT: The share of subnational governments in public investment is well below the average of OECD countries (54.6% of public investment and 1.9% of GDP in 2019). Most municipal investment is dedicated to transport infrastructure, and particularly local roads, public transport, tourism and business infrastructure, followed by education infrastructures and recreation and culture. In contrast, municipalities invest very little in social protection, housing or general public services. Estonia is a major beneficiary of the European Structural and Investment Funds (ESI Funds), which plays a significant role at the municipal level, funding projects like schools, child-day centres, etc. At the national level, the government planned to allocate 1.3% of GDP to infrastructure investment over the period 2018-20, 40% of which will be directed to the transport sector. The implementation of a programmed budgeting system is being discussed, where planned costs, revenue, investments and financing transactions in the annual state budget, would be presented on a regular basis as a way to increase the public management performance both at the national and subnational level.

Subnational government expenditure by functional classification
	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure by economic function	3 841	10.0%	-	100.0%
1. General public services	240	0.6%	7.3%	6.3%
2. Defence	0	0.0%	0.0%	0.0%
3. Security and public order	10	0.0%	1.4%	0.3%
4. Economic affairs/transports	549	1.4%	33.3%	14.3%
5. Environmental protection	120	0.3%	45.6%	3.1%
6. Housing and community amenities	154	0.4%	99.3%	4.0%
7. Health	581	1.5%	17.2%	15.1%
8. Recreation, culture and religion	356	0.9%	44.6%	9.3%
9. Education	1 537	4.0%	53.4%	40.0%
10. Social protection	294	0.8%	5.2%	7.7%

The largest subnational government expenditure category is by far education, as municipalities are responsible for both current and capital expenditure in this area, accounting for 4.0% of GDP and for 40% of subnational government expenditure, above the OECD average of 24.3% in 2020. Health is another important spending area, since subnational governments are responsible for some health care institutions. They accounted for 15.1% of subnational government expenditure in 2019. Municipalities do not cover their health expenditure directly from local budget but from the national Health Insurance Fund. Housing and community amenities stand for 99.3% of general government expenditure in the same category, which means that this is an almost exclusive competence of municipalities. However, spending in this category only amounted to 0.4% of GDP in 2019. On the other hand, the share of subnational government spending dedicated to general services remains among the lowest across the OECD (15.0% on average as a share of subnational government expenditure in 2019).

Subnational government revenue by category
	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total revenue	4062	10.7%	26.6%	100.0%
Tax revenue	99	0.3%	1.2%	2.4%
Grants and subsidies	3608	9.5%	-	88.8%
Tariffs and fees	316	0.8%	-	7.8%
Income from assets	30	0.1%	-	0.7%
Other revenues	9	0.02%	-	0.2%

OVERALL DESCRIPTION: Estonian municipalities, especially those in rural areas, do not have many possibilities of shaping their revenues, composed for the major part of central government transfers. The share of grants and subsidies as part of subnational government revenue is much larger in Estonia than the OECD average (41.2% in 2020), whereas the share of tax revenue in subnational government revenue is much lower than in the rest of OECD unitary countries (42.4% in 2020).. It is important to note that before the 2008 reform of the SNA (implemented in 2014), revenues coming from the sharing of national taxes such as the personal income tax (PIT) were considered tax revenue. Since the reform, they are considered grants from the central government as subnational governments had no rate-setting power over it, hence the strong decrease of the tax ratio in Estonia.

Over time, the share of grants and shared PIT tax revenue of total municipal revenue has become bigger. This is because between 2012 and 2019, the municipalities' own revenues have remained virtually unchanged, while at the same time the state grants and shared tax revenues have increased. Overall, the fiscal autonomy of municipalities is very limited.

TAX REVENUE: The share of tax revenue in local revenue is negligible, in particular since the implementation in 2014 of the 2008 SNA methodology, which reclassified some shared taxes as transfers. Estonia is the most centralised country of the OECD regarding taxation, with tax revenue accounting for only 0.3% of GDP and 1.2% of public tax revenue (to be compared to 7.2% of GDP and 32.3% of public tax revenue in OECD unitary countries on average). Additionally, municipalities have limited autonomy to introduce new taxes.

The main local tax is the land tax. Municipalities are free to set the land tax rates within limits set by the central government (in 2021 the band was 0.1% – 2.5%). The rate on agricultural land can vary between 0.1–2.0%. Municipalities are also free to set different rates in different zones in their area and to give tax relief to special taxpayer groups. At present, the land tax rates vary between 0.5% and 2.5% and the average tax rate is 2.4. The taxable land values are still at the level they were in 2001. Since 2012, the land tax rates have not changed markedly. New evaluation will take place in 2022 and will be enforced in 2024. The land tax accounted for 83.1% of municipal tax revenue and 2.1% of their total revenue in 2019. It amounted to 0.22% of GDP, which is well below the OECD average (1.0% of GDP). Other notable municipal tax revenues comprise the advertisement tax, the road and street closure tax and the parking charge. Taken together, in 2020, these taxes were only 1.1% of municipal tax revenues.

GRANTS AND SUBSIDIES: Local governments are overwhelmingly dependent on state grants and transfers, which make up to 89% of total local revenue. Most municipal grant revenues come from the sharing of PIT receipts with the central government. The share of the PIT allocated to local governments was 11.93% of taxable income in 2020. Currently, the income tax rate is 20% in Estonia and thus the rate earmarked to central government is 8.07%. Municipalities receive about 70% of the PIT, while the central government receive 30%.

The grant system is formed by two main elements: earmarked grants (81% of all grants to municipalities) and the equalization grant (19%). While the current grant system has been in place for 15 years, the system has seen some minor changes over the years. The earmarked grant system consists of several specific grants, the most significant of which is the grant for general education (77% of all block grants). The grant for general education is targeted at financing teachers’ and school leaders’ salaries (80% of the grant), school lunches (7%) and the study support to pupils with special needs (6%). The grant is based on the number of pupils and several need indicators. Other main earmarked grants include the grant for local roads (6% of all earmarked grants), the grant for subsistence allowance (4%), and the grant for social support to young adults (4%).

Grants also include the Equalisation Fund scheme, which ensures the redistribution of revenue to the poorest municipalities (Section 47 of the 2014 State Budget Act, amended in 2017). Equalisation transfers are defined yearly in the state budget. The equalisation grant is based on the difference between the estimated average operating cost of the municipality and estimated own revenue of the municipality. The estimated revenue consists of municipal share of income tax revenue and land tax revenue and estimated expenditure is based on calculation using information of expenditure needs. Currently, 90% of the (positive) difference is considered. The equalisation formula also takes into account the “island municipality” status.

Local governments also receive capital grants, including EU funds, which finance approximately one-third of their total investment. Finally, in the framework of the Administrative Reform, local governments that carried out successful merger negotiations received specific grants, of varying amounts according to the procedure and size of the merger.

OTHER REVENUE: Other revenue for local governments includes user charges, fees and revenues from economic activities, which account for around 8.7% of municipal revenues, a smaller percentage compared to the OECD average of 16.5% in 2020.

Subnational government fiscal rules and debt
	Dollars PPP / inh.	% GDP	% general government debt	% SNG debt	% SNG financial debt
Total outstanding debt	1 715	4.5%	17.8%	100.0%	-
Financial debt	1 240	3.3%	16.9%	72.3%	100.0%
Currency and deposits	0	-	-	0.0%	0.0%
Bonds / debt securities	117	-	-	6.8%	9.4%
Loans	1 123	-	-	65.5%	90.6%
Insurance pensions	0	-	-	0.0%	-
Other accounts payable	474	-	-	27.7%	-

FISCAL RULES: The 2010 Local Government Financial Management Act states that the local government operating result shall not be negative at the end of an accounting year. It also provides for a “recovery plan” to re-establish fiscal discipline, which may include the amendment of local government legislation on the revenue and expenditure sides. The State Budget Act enacted in 2014 established the Fiscal Council, which strengthened the overall fiscal framework. The National Audit Office, an independent public body, reports to the parliament on the financial situation of central and local levels of government, as well as on other issues such as transparency and the prevention of corruption. It is headed by the Auditor General, who is recommended by the president and appointed by the parliament for a term of five years.

DEBT: Municipalities can contract long-term loans or bonds but only to fund investment projects (“Golden Rule”). According to the 2010 Local Government Financial Management Act (LGFMA), the debt ceiling for municipalities ranges from 60% to 100% of the current year’s operational revenues (depending on their self-financing capacity). The weight of local debt in GDP (3.3%) is significantly lower than the OECD average for unitary countries (14.5% of GDP in 2020). As a share of public debt, it is however significantly higher than the OECD average for unitary countries (10.5%). Financial debt is made up primarily of loans (90.6%) and to a lesser extent of bonds (9.4%).

TERRITORIAL MANAGEMENT OF THE CRISIS: According to the Estonian Constitution, the government is responsible for declaring an emergency situation throughout the state, or in a specific region. The Emergency Act and the Communicable Diseases Prevention and Control Act have formed the legal basis of the measures taken during the pandemic.

The Crisis Management Committee of the Government has been the main body for coordination. Based on the Emergency Act, emergency committees were also established at the regional and municipal levels. The local crisis management committees have mainly assisted the centralised crisis management.

While the decisions on restrictions on freedom of movement have been decided mostly at the national level, the Emergency Act requires that crisis management duties be based on the principle of subsidiarity – i.e. at the lowest possible government level. Based on this, the local emergency committees decided on more extensive restrictions on freedom of movement in certain regions.

EMERGENCY MEASURES TO COPE WITH THE CRISIS AT THE DIFFERENT LEVELS OF GOVERNMENT: In December 2020, the government approved new measures to support the areas and sectors most affected by the new restrictions to contain the second wave. A package of €5 million was approved on 17 December to support businesses in Ida-Viru county and more generally culture, sports, and education all over Estonia. On 30 December, the government approved a EUR 30 million package to further support businesses in Harju and Ida-Viru counties, which were under the most stringent restrictions. In 2020, the government signed a EUR 200 million loan with the council of Europe Development Bank (CEB) to finance crisis mitigation measures.

The supplementary budget adopted in mid-April 2020 in response to the pandemic brought municipalities EUR 130 million. Of this, about EUR 30 million was paid to compensate for reduced revenue and increased costs due to the crisis, EUR 30 million was earmarked for local roads and EUR 70 million for new investments. Local governments were also permitted a higher debt burden than before, rising from 60% of annual revenue to 80% for the years from 2021 to 2025.

IMPACTS OF THE CRISIS ON SUBNATIONAL GOVERNMENT FINANCE: The pandemic had a negative effect on Estonian GDP (-3.0% in 2020 in real terms), it increased again by 8.3% in 2021, but is expected to decrease again by 1% in 2022. Unemployment resulting from the crisis among the working-age population was highest in Ida-Viru county located in North-Eastern Estonia. Unemployment was slightly lower in cities and towns compared to rural areas.

As most municipal revenue comes from central government transfers, and the main own tax is the land tax, which is nearly immune to short term fluctuations, the overall impact of COVID-19 on municipal revenue has been limited. In fact, in 2020 the municipal revenue increased by EUR 44.9 million (3.5%). The impact on expenditure has been more severe, despite the fact that municipalities are not directly involved in health care provision. However, as elsewhere, the special arrangements and costs of protection needed in education and social services have increased municipal costs (the total municipal expenditure change from 2019 to 2020 was 3%).

ECONOMIC AND SOCIAL STIMULUS PLANS: The EU Recovery and Resilience Facility funds for Estonia contribute to reforms and investments that support the green and digital transitions. The plan consists of 25 investments and 16 reforms. They will be supported by EUR 969.3 million in grants. 41.5% of the plan will support climate objectives and 21.5% of the plan will foster the digital transition. When designing the plan, Estonian authorities consulted national and regional social partners and stakeholders. The funds are used for various projects. At the subnational government level examples of projects include implementing a common transport system for the Tallinn capital region, and municipalities’ investments in bike and walking paths.