Since the establishment ofLithuania's independence, the country achievedsubstantial progress in transforming its local governmentsinto independent units of Government: structural reforms toprod intergovernmental relations were made in 1994 and 1997,and will continue in 2002. Nevertheless, several issuesremain, requiring particular attention from the Government.First, revenue and expenditure assignment between levels ofgovernment, and the degree of central regulation over localfinance, needs to be reviewed. Local governments face fiscalconstraints, for revenues are centrally collected, anddistributed at centrally determined rates. And, althoughlocal governments have nominal authority over theirexpenditures, major items (salaries and welfare payments)are subject to Government control, resulting in localgovernments being faced with running arrears, or borrowingfrom the Government or private lenders. Although high percapita jurisdictions are required to share revenues withpoorer counterparts, it is not clear that distributionmechanisms actually allocate revenues as needed. Upcomingreforms are likely to change this, but a greater change inthe revenue distribution criteria, would be by fundingdelegated functions, but distributing according tosector-specific indicators of need, as well as budgetingfinancial availability. Second, financing capital investmentmay be improved by a greater fiscal autonomy to localgovernments, and mostly, by improving the quality offinancial information, with reforms that include theseparation of current, and capital accounts, and theadoption of accrual accounting for expenditures.
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