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Subsidies of territorial communities’ budgets as a financial mechanism for inclusive rural development


Equalising the financial capacity of different settlements and territories was in the spotlight of the state authorities at all stages of development. In the context of decentralisation and focusing on goal achievement of sustainable, inclusive development, the principles of horizontal equalisation of the tax capacity of territories were changed, and a new model of budgetary relations was introduced. The article analysed the results of the new model implementation, investigated the transfer dependence of local budgets with centres in villages, towns, and cities, and considered subsidies as a mechanism for inclusive rural development. It was determined that due to financial decentralisation and strengthening of the fiscal capacity of communities through increased tax revenue by an average of 27%, the share of subsidised local budgets decreased from 95% in the pre-reform period to 75% in 2021. It is estimated that rural territorial communities are the most transfer-dependent, and among the recipients of the basic subsidy as a tool to support the territory`s fiscal capacity, their share is 45,3 %; among township communities – 31%; and among urban communities – 21,9 %. It is substantiated that the lack of financial resources and significant dependence on central budget support is due to the weak rural labour market and the predominance of informal employment (employment without taxes). And the dispersed rural settlement network, the higher cost of services per capita, the long-term decline of infrastructure and, accordingly, the higher cost of its restoration, requires additional subventions to maintain the multifunctionality of rural areas. This underlines the need to introduce special mechanisms of financial support for villages, considering the shortcomings of previous year’s subsidies. Using the example of infrastructure subvention of territorial communities, the amount of which depended on the number of the rural population, proved that the distribution of funds is inconsistent with the principles of inclusion. Further research will focus on the financial resources of communities and the development of mechanisms for equitable distribution and use among all settlement units to enhance the inclusiveness of rural development. The new challenges caused by russian federation’s war against Ukraine will require the development of updated methods of state financial support for territorial communities. It will be based on a realistic estimate of the number of people living in communities at the end of the war, the value of destroyed and damaged property, etc. In the short term, local self-government bodies will prioritise efforts for rapid and qualitative recovery, redefining community development strategies with stronger inclusiveness and realistically estimating the number of people for whom and with the help of which the development of the country will take place.

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