Financial management of local authorities in Sweden Problems of scale Björn Sundström SALAR

2 Municipalities and county councils/regions Municipalities County councils (21 Counties)

Local government expenditure Source: Eurostat, national sources and DEXIA calculations

Composition of local government revenues Source: Eurostat, national sources and DEXIA calculations

Local govenment tax revenue Source: Eurostat, national sources and DEXIA calculations

6 Breakdown of municipalities’ costs for activities

Problems of scale The smaller the municpialities are the higher are the costs per capita (SEK per capita) SEK/ capita Municipalities by size

Costs for elderly care, infrastructrure and politics are especially high in small municipalities Cost per capita (SEK) for elderly care by sizeCost per capita (SEK) for political activities by size Cost per capita (SEK) for infrastructure by size

We live in a new economic geography! Size of the labour market regions Number of growing Municip.

Small today Small tomorrow

How to handle the challenges

Delegated functions Inter-municipal cooperation

Development of local government income tax rate 1930– Elderly care reform

Boundary reforms in Sweden (municipalities) rural municipalities, 10 boroughs, 90 town/cities -816 rural municipalities (> 2000 inh/municip.), 88 boroughs, 133 town/cities -> 8000 inh./municipality, coherent territory in terns of economic geography, municipal blocks (300) -Voluntary merges -Compulsory municipal boundary reform (obligatorium) -The amalgamation reform is implemented (277 municip.) -277 municipalities became 290

A new municipal structure in Denmark -In 2007, 271 municipalities became 98 with an average size of 55,000 inhabitants, -14 counties became 5 regions -A minimum size for the new municipalities was set at 20,000 inhabitants -Regions, as opposed to the counties, cannot impose taxes -New tasks to perform for the municipalities -A financing and equalisation reform necessary

The equalisation system Income equalisation: tax base guarantee as per cent of national average taxable income Cost equalization due to demography, rural areas etc Equal economic conditions to all municipalities and county councils Differences in tax rates reflects only different efficiency or ambition

Why income equalisation? Large differences in taxable income With an average (income) tax rate of 20,70 % will Danderyd obtain a tax income of SEK per capita. Borgholm obtain a tax income of SEK per capita. All municipalities need approx SEK per capita

Income equalisation for municipalities, outline diagram

Why cost equalization? Cost per capita in different agegroups

Level of charge-financing in municipal tax-financed activities

Level of charge-financing in municipal business activities

The financing principle “No new responsibilities should be imposed on the municipalities and county councils unless they can finance them without raising taxes. If the Government or Parliament adopt decisions that enable the municipalities to provide services more cheaply, they should reduce government grants to a corresponding extent.”

Managing local government reforms 1.Have focus on the challenges to be solved 2.Criteria for distribution of responsibilities have to be discussed 3.Overall vision and strategy 4.Find necessary support for the reforms 5.Organisational structure A strong change management as well as effective project management is most important

Tax on income from employment Social security contributions (employer contributions etc.), 43%, are included in tax on income from employment in the municipal sector

25 Taxation  Municipalities and county councils have constitutional power to independently set the local tax rate  Tax base = wages, entrepreneurial income, social benefits replacing income, pensions. Minus basic deduction.  Average tax rate 2011 = 31,55 % (20,73 % municipalities + 10,88 % county councils)  Highest combined tax rate = 34,17 % (Ragunda, Jämtland)  Lowest combined tax rate = 28,89 % (Vellinge, Skåne)  Small real estate tax to municpalities introduced 2009

Composition of local government revenues Source: Eurostat, national sources and DEXIA calculations