National Audit Office: The state has delayed lifting restrictions on the use of local government funds

12/19/2022 | 9:31 AM

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TALLINN, 20 December 2022 – The administrative reform that took place five years ago made local governments bigger but giving them a greater role and responsibility has been delayed. The state continues to restrict the freedom of choice of cities and rural municipalities in the use of funds to a large extent, and agreements to increase freedom of action foremost in the area of education and infrastructure have not been implemented. There are no compelling arguments for continuing with restrictions on the use of funds, and if the state wants to provide a meaningful continuation of the administrative reform, it is necessary to trust local governments more in financial matters, the National Audit Office finds in its audit published today.

“The Ministry of Finance and various governments have repeatedly said that we need not only larger but also more capable and more responsibility-taking local self-governments,” reminded the Auditor General Janar Holm. “That cities and rural municipalities must be given a greater role and responsibility in the performance of public functions is something that has been heard from both experts and politicians. This also means greater freedom for local governments in the use of funds and a reduction of the allocation of so-called labelled funds from the state budget.”

Cities and rural municipalities currently receive nearly a fifth of their revenue from the support fund, the rules for using which have been determined in advance by the state and which cannot be changed by local governments. The fund supports, for example, the payment of school teachers’ wages, local road maintenance, the provision of certain social services and hobby education. In 2017, under the leadership of the Ministry of Finance and with the approval of the government, together with the merging of rural municipalities, a plan was initiated to increase the financial autonomy of cities and rural municipalities by lifting restrictions on the use of the support fund from the state. However, the plan to abandon the labelling of support funds on the example of Nordic states and to direct these funds to the general revenue base of local governments has not come to fruition, although it has been discussed by almost all governments since 2017.

“The restrictions on the use of support funds show that the state does not trust the choices of local governments, because all the areas where support funds can be used concern local life,” commented the Auditor General Janar Holm. The process has lost concreteness in its goals over time, and deadlines have been pushed further and further into the future. The original deadline of 2021 has passed, and the new general deadline that has been discussed is as far in the future as 2035.

The National Audit Office finds that some ministries are constantly postponing decisions regarding the support fund. It appears from the communication with ministries that they are in an endless phase of analysis and forming opinions, although five years have already passed since the beginning of the process. The lifting of a restriction on the use of funds from the support fund has been on the table of the Government of the Republic several times at the initiative of the Ministry of Finance, but it has not brought about any changes because both the Ministry of Education and Research and the Ministry of Economic Affairs and Communications are hesitating. The Ministry of Social Affairs has also previously been hesitant, but we are happy to recognise that a decision was recently made to lift restrictions on the use of benefits for alternative and continued care service and funeral benefits by 2024 and to also amend the Social Welfare Act accordingly.

Some area-specific ministries are afraid that lifting the restrictions will cause these funds to go elsewhere in the local government (for example, funds for teachers’ wages will go to roads or vice versa). Local governments, in turn, fear that the state will introduce additional requirements in these areas after abolishing the intended purposes which the funding model will not take into account going forward.

Based on the audit, the National Audit Office admits that there are no compelling arguments in favour of continuing the use of support funds with restrictions. There is no data showing that positive developments in the supported areas of local life – for example, wage increase, increase in the number of recipients of service – have taken place precisely because the freedom of local governments in the use of support funds is restricted.

The only measurable effect resulting from restrictions on use is the expenditure of funds in the supported area, but local governments already finance these areas in a larger volume than what they receive in support from the state, and their own contribution has increased in recent years. For example, the local governments’ own share in covering the wage costs of teachers has increased in recent years about 10% faster than the support received from the state, while the contribution of local governments in financing local roads has increased by about 95%, i.e. almost twice as fast.

“The fear that the financing of areas in local governments would change drastically by lifting restrictions on the use of grants does not seem to be justified,” said Auditor General Janar Holm. At the same time, in the long term, the lifting of restrictions expands the possibilities to direct funds to where it is most useful, considering the needs of the community, which also creates prerequisites for improving the efficiency of the use of public funds. Reasonable choices in various areas of local life should be made primarily through community discussion.


The support fund for local governments has a total of eight grants for financing local government functions: grant for running general education schools, maintenance grant for local roads, benefit for alternative and continued care service, grant for the labour costs of preschool teachers, grant for hobby education and hobby activities, funeral benefit, benefit for providing assistance to a child with a severe and profound disability, grant for transferred former national roads. The state budget for 2022 provides 461 million euros to cover these, the majority of which is spent on running general education schools (381 million euros). Support for running general education schools is in turn divided into eight subtypes (wage support for basic school teachers, wage support for upper secondary school teachers, etc.).

Lifting the restrictions on the use of the aforementioned grants has been the goal of almost all Governments of the Republic following the administrative reform. Some time has passed since the reform, so the National Audit Office analysed what has been done to achieve this goal and under what circumstances has the goal not yet been achieved.

Priit Simson
Head of Communications of the National Audit Office of Estonia
+372 640 0102
+372 5615 0280
[email protected]
[email protected]

  • Posted: 12/19/2022 9:31 AM
  • Last Update: 12/20/2022 10:27 AM
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