LOCAL FISCAL EQUALIZATION IN ESTONIA: IS A REFORM NECESSARY?

Estonian municipalities perform a broad range of functions, while their fiscal resources are often limited, and large disparities in fiscal capacity prevail within them. Moreover, the power to regulate fiscal affairs is mostly in the hands of the central government. We discuss how a strict application of the connexity principle can protect municipalities from the fiscal bottleneck in this country. We also recommend the introduction of the principle of parallelism and investigate its effects on the unconditional grant system in Estonia. In particular, the procedure of determining the total sum of block grants needs to be changed.