Portugal: The reform of the Local Finance Law

Abstract

In January 2007, a new Local Finance Law came into force, whose objective was to increase the equity and efficiency of sub-central public finances, while being financially neutral for the central government (). One of the main aims of this reform was to tighten the budget constraint and to reduce the revenue dependence of municipalities on immoveable property. In particular, municipalities relied heavily on housing transaction fees as a revenue source, which gave local governments an incentive to grant building licenses that led to urban sprawl. Another objective was to reduce corruption and other illegal practices at the local level. Finally, the reform aimed at increasing equity by correcting flaws in the previous 1998 Local Finance Law, which were seen as favouring small municipalities over larger ones.