Municipalities should raise more money locally, particularly from commercial property tax, the Bank said in a review of Serbia's municipal finances. The review, published yesterday, noted that the economy had been in crisis since 2009 and its deficit was steadily increasing. While central government had begun to address falling tax revenues and high spending, local government had been ‘partially shielded’ from the revenue downturn.

In 2011, the proportion of payroll tax revenues allocated to municipalities was doubled from 40% to 80% in 2011. This was expected to increase municipal revenues by an amount equivalent to 1.6% of gross domestic product and reduce central government resources by the same amount.

William Dillinger, lead public sector management specialist at the World Bank, said: ‘This is not the time to debate whether local governments have too much money or too little. Given the fiscal situation, both levels of government must adjust.’

According to the report, the best way to achieve this is to reverse the increase in payroll tax revenues allocated to local government.

Municipalities could also reduce their reliance on central fiscal support, such as by increasing the amount they raise from locally administered taxes and fees, the report said. It noted: ‘Yields of the property tax, for example, could be increased by valuing industrial and commercial property at market prices.’ Addressing the ‘gross undervaluation’ of company property under this tax could increase property tax revenues by up to 50%, it claimed.

There might also be opportunities to increase the efficiency of services directly financed by local government, such as road maintenance and pre-school education, and to reduce the subsidies given to enterprises such as transport and district heating companies.

‘None of these measures would, of course, directly reduce the fiscal burden that municipalities now impose on the central government. But they would permit the central government to scale back its fiscal support to municipalities without necessarily forcing a decline in the quality of municipal services,’ the Bank explained.

It did, however, warn against giving more powers to local government. A proposal to give municipalities more responsibility for running roads has been met by opposition from local government and ‘leaves much to be desired as a strategy for rebalancing central and local resources’, the report said.