Directions for improving the formation of financial resources of local governments in the context of decentralisation

Abstract

The article examines ways to improve the formation of financial resources of local governments in the context of decentralisation. The relevance of the study is determined by the transformation of Ukraine’s local finance system, the expansion of the powers of territorial communities, and the need to ensure their financial capacity amid martial law, the destruction of economic and critical infrastructure, and the growing pressure on local budgets. The aim of the article is to develop and substantiate directions for improving the formation of financial resources of local governments under decentralisation. The study employs methods of analysis, synthesis, comparison, systematisation, and generalisation. The information base comprises regulatory and legal acts, official materials of the Ministry of Finance of Ukraine, data on municipal borrowing and concession agreements, as well as publications and reports of international financial institutions. International experience in fiscal decentralisation is analysed, and the prospects for adapting selected elements of European, Polish, Scandinavian, Canadian, and American models to the Ukrainian context are identified. The study substantiates the need to broaden the own-source tax base of territorial communities, improve property taxation, develop commercial infrastructure, streamline land relations, and establish institutional instruments for regional development. The article identifies directions for transforming the system of fiscal equalisation aimed at reducing territorial disparities. These include improving the formula-based approach to calculating intergovernmental transfers, introducing special compensation mechanisms for war-affected communities, developing incentive-based transfers, modernising the reverse grant mechanism, and integrating medium-term budget planning. The need to take into account the endogenous potential of territories and the environmental consequences of hostilities, as well as to align fiscal equalisation mechanisms with strategic spatial development and post-war recovery documents, is emphasised. Particular attention is paid to the potential of innovative financial instruments as additional sources of funding for territorial communities. The study examines municipal bonds, public-private partnerships, local tax incentives, digital platforms, and participatory budgeting. Drawing on Ukrainian and international experience, the advantages and limitations of these instruments are identified. The main barriers to their systematic implementation include regulatory constraints, financial and market risks, insufficient institutional and project management capacity of individual communities, the need to establish a secure digital environment, and the necessity of accounting for war-related risks. The article proposes the development of long-term financial strategies for territorial communities that combine budget planning, municipal borrowing, public-private partnerships, and tax incentives. It substantiates the feasibility of blended financing models, the development of digital platforms for local financial management, the strengthening of the financial and project management capacity of local governments, and greater public participation in setting investment priorities. The study concludes that a comprehensive combination of traditional and innovative financial instruments can strengthen the financial autonomy and investment attractiveness of territorial communities, provide additional sources of long-term financing for critical infrastructure, and create the necessary conditions for building a resilient local finance system in Ukraine.