THE EFFECTIVENESS OF FISCAL DECENTRALISATION AS A COMPONENT OF THE PUBLIC FINANCE SYSTEM IN TIMES OF TRANSFORMATION

Abstract

Introduction. Fiscal decentralization is considered a crucial element of the public finance system, as it strengthens local self-government, enhances financial autonomy of territorial communities, and improves the quality of public services. In Ukraine, the decentralization reform launched in 2014 became one of the most significant institutional transformations, aimed at redistributing fiscal powers and resources between central and local levels. However, the effectiveness of this reform has been challenged by deep socio-economic shocks, including the COVID-19 pandemic and the full-scale war, which have triggered forced fiscal centralization, weakened local revenue capacity, and increased dependence on intergovernmental transfers. Purpose. The purpose of the article is to assess the effectiveness of fiscal decentralization as a component of Ukraine’s public finance system under transformation conditions and to justify practical directions for improving interbudgetary relations in the post-crisis and post-war period. Methods. The research utilised a systematic approach, which allowed fiscal decentralisation to be considered as a complex element of public finances in conjunction with the state's budgetary policy and the financial capacity of local communities. Methods of analysis and synthesis were used to generalise the theoretical provisions and practical results of budget reform; a comparative method was used to assess the peculiarities of local budget functioning at different stages of reform (2015–2019, 2020–2021, 2022–2024); structural-dynamic analysis was used to identify changes in the distribution of revenues and transfers between the state and local budgets. The generalisation method was also used to formulate recommendations for improving the effectiveness of fiscal decentralisation in the post-war period. Results. The research confirms that during the first phase (2015–2019) fiscal decentralization significantly increased the share of local budgets in the consolidated budget, expanded communities’ own revenue sources, and improved local development opportunities. The second phase (2020–2021) demonstrated that pandemic-related restrictions caused revenue losses and partial centralization of expenditures, revealing vulnerability due to high dependence on personal income tax (PIT). The third phase (2022–2024) was characterized by wartime fiscal centralization, particularly through the reallocation of military PIT to the state budget, which led to a decline in local budget capacity and reduced fiscal autonomy. The study highlights risks of long-term imbalance in multi-level governance caused by the critical reduction of local financial resources. Conclusion. The article substantiates that restoring fiscal balance after the war requires a structured “roadmap” for returning to decentralization principles. Key proposals include gradual re-expansion of local revenue bases (including partial return of military PIT or compensatory instruments), strengthening local tax authority, ensuring symmetry between transferred responsibilities and financial resources, revising equalization formulas considering war-related demographic shifts and infrastructure losses, and enhancing institutional capacity and transparency of local financial management through digital tools and public control mechanisms.