The aim of this paper is to provide detailed information about the Local Fiscal Optimality in FYROM and as study case in taken the municipality of Tetovo as one of the biggest municipality in the country.
Achieving local fiscal optimality in the municipalities of FYROM and especially in the municipality of Tetovo even today remains one of the most important challenges in fiscal and institutional management of the local governments. The harmonization of financial revenues and expenditures in the municipality of Tetovo and also in the other municipalities in FYROM remains one of the crucial issues in the processes of local government, due to the fact that FYROM is still a country in transition and has a very low rate of economic development and the high level of financial centralization prevents local sustainable development. This is the reason why most of the municipalities fail to meet even the basic needs of its citizens because they lack financial resources to meet many of the requirements for capital investments, investments in education, culture, sports, etc. This big imbalance between revenues and expenditures of local governments makes it impossible to achieve fiscal optimality point at which financial revenues would cover the expenditure.Through our econometrical model we conclude that the revenues from VAT (Value Added Tax) which the municipalities receive in return from the total VAT revenue that is collected is only 4%, and it is at a very low level and increasing the VAT revenue return from 4% to 11.45%, will result with optimal level of revenues to cover the actual expenditures of local governments. This result can be useful for both central and local governments not only in FYROM but also in the region as a model for redefining the methodology of distribution of incomes and taking more steps toward fiscal decentralization.