Fiscal rules for sub-central governments

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Fiscal rules for sub-central governments a
Norwegian perspective

• Rune J. Sørensen
• Norwegian School of Management (BI), Oslo, Norway
• E-mail rune.sorensen_at_bi.no
• For presentation at the second meeting of the
  network on fiscal relations across levels of
  government, OECD Headquarters, Paris 8-9
  September 2005

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Outline

1. Why regulate sub-central governments
2. The political strength of cental government
3. The Nordic system of local government
4. The Norwegian hospital sector
5. The allocation costs of tax regulation

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A need for central regulations?

• Common pool problems
• due to vertical fiscal imbalances, and
• weak central government.
• Intertemporal imbalances
• due to local borrowing and residential mobility,
  and
• soft central budget constraints.
• Imperfect voter controls

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A need for central regulations cont.

• Information problems may induce local
  politicians to vote for higher public spending
  levels
• Local government politicians offer voters a
  better service supply, while voters keep national
  politicians responsible for tax increases (or
  local deficits)
• BUT Central government sets minimum standards
  and entitlements, which must be met by local
  governments (unfunded mandates). Voters may
  keep local politicans responsible for tax
  increases

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2. A strong central government?

• Political structure of central government
• Election systems and party fragmmentation
• Types of parliamentary government
• Selected empirical studies
• Common pool Inman Fitts (1990) Borge Rattsø
  (2002)
• Intertemporal imbalance Roubini Sachs (1989)
  Alesina Perotti (1995) Inman (2003)

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3. The nordic local government model

• Administrative federalism
• (Nordic model)
• Individual welfare services
• Representative democracy
• Extensive central controls, including
• High share of central grants
• Limited tax discretion and other fiscal rules

• Fiscal federalism
• (the standard version)
• Local public goods
• Residential mobility, including tax competition
• Local discretion, including
• Local tax financing, small central grants
• Discretion with respect to tax rates

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Norwegian local government consumption Forecasts
in the National Budget and National Accounts1)
1990-2003 averages Planned growth rate 1,6
Actual growth rate 2,4
1)2002 is missing.
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4. The Norwegian hospital sector

• In january 2002, Norway transferred the
  responsibility for the hospitals from county
  governments to central government
• Did transfer of responsibility from local to
  central government solve problems of spending
  control?

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Public health care spending i Norway 1997-2004
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Production growth in the Norwegian hospital
sector measured in DRG points. Source Terje P.
Hagen, University of Oslo 2005.
Central government responsibility
County responsibility
Actual growth rate
Planned growth rate
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5. The allocation cost of tax regulation

• Rural municipalities
• They receive large central grants, partly to
  compensate diseconomies of scale and
  demographics, partly as part of regional policy.
• The outcome is high levels of local public
  consumption, and very high levels of local public
  consumption relative to private revenues.
• Urban municipalities
• They receive small central grants.
• Local public consumption is very low relative to
  private revenues.
• Does central rax regulation induce an allocation
  loss?

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Allocation loss due to Norwegian tax regulation
(Sources Statistics Norway 2003 Questionnaries
to local politicians 1995,1999,2003, N6247 Data
from various population surveys 1993-2003, N8594)
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Estimates of allocation loss

• Assumptions
• Price elasticity -0,4
• Income elasticity 0,6
• Allocation loss (consumer surplus) based in
  2003-data1000 NOK per capita (municipal level)
  or about 3 percent of local government revenue
• Source Borge, L.-E. 2003. More tax autonomy for
  Norwegian local governments possible
  implications for efficiency and service
  provision. Mimeo. Norwegian University of Science
  and Technology

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