Local government finance -Norway

Oddbjørn Bukve

This project is co-funded by the EEA Grants and the state budget of the Slovak Republic from the EEA Scholarship Program Slovakia

Structure

• Decentralization ratios• Sub-national shares of aggregate government expenditure and revenue (including sub-national share

of total government taxation)

• Revenue assignment and revenue autonomy• Local government revenue – own-shared- transferred • Local government discretion over taxes • Intergovernmental fiscal relations – transfers (grants and tax sharing)

• Expenditure responsibilities • Assignment of expenditure functions to local governments• Discretion accorded to local governments over the use of resources

• Subnational borrowing• Restrictions on local government borrowing • The level of local government indebtedness in relation to public debt

• Main issues and challenges for local government finance

Decentralization ratio

• Sub national (including both municipalities and counties) share of public consumption was 49,7 % in 2014• This high share reflects the role of Norwegian local

governments as welfare municipalities, providing welfare services in sectors like social welfare, elderly care, education and health services

• Sub national share of total public revenue was 11,9% in 2011• This lower share reflects that much of state revenue is spent

on transfers to individuals and households (pensions, social benefits) and the revenue from oil taxes (23,5 % of total revenue), which are placed in a special fund

Sub national share of public consumption - Norway

2008 2012 2015

Total publicconsumption

485,0 618,9 727,1

Stateconsumption

250,1 310,3 369,2

LG consumption 234,9 308,6 358,0

LG share of consumption

48,4% 49,9% 49,2%

In current pricesSource: Statistisk Sentralbyrå 2016: Økonomiske analyser 2016/1

Sub national revenue share (2011) State

Million NOKMunicipalitiesMillion NOK

CountiesMillion

NOK

Sub nationalShare (%)

Personal taxes 244 900 107 700 23 300 34,8

Corporate income tax 70 200 1 300 1,8

Property tax 7 200 100,0

Employer tax 139 300 0

Duties (VAT, customsetc)

314 200 0

Oil 244 800 0

Other 29 600 600 200 2,6

Total 1 043 100 116 900 23 500 11,9

All direct taxes 728 800 116 900 23 500 16,2

Oil taxes excluded 484 000 116 900 23 500 22,4Source: SSB: Statistikkbanken

Local government revenue

• Types of revenue• Transfers (2014: 46% of total revenues)

• Taxes (2014: 36 % of total revenues)

• Fees on services (2014: 13% of total revenues)

• Other incomes (2014: 5%, mainly financial incomes)

• In the Norwegian case, transfers from the state is a more important source of revenue than taxes

LG tax income 2011Tax type Municipalities

2011Million NOK

% Counties2011

Million NOK

% All local government

2014Mill NOK

%

Personal income tax 99 300 84,9 23 300 99,1 148 468 87,6

Personal tax on wealth 8 400 7,2 9 396 5,5

Corporate income tax 1 300 1,1 200 0,9

Property tax 7 200 6,2 9 594 5,7

Other 600 0,5 2 100 1,2

Total 116 900 99,9 23 500 100,0 169 558 100,0

LG discretion over taxes• Tax on income and wealth (most important tax source)

• Formally the Storting (national parliament) decide only a maximumrate of local income tax, but all 428 municipalities are using themaximum rate

• LG income tax is a flat rate. The income from a progressive tax onpersonal income goes to the state

• Taxation on wealth is according to fixed rates

• Property tax• A voluntary local tax, with a fixed maximum rate• Can be used for all kind of property or only commercial properties• 2007: 146 municipalities did not use this tax, 140 only for commercial

properties

• Tax on natural resources (licences for use)• An important income source for a small number of municipalities with

hydroelectric power stations• Not an option for all LG’s

LG discretion over taxescompared

Norway Slovak republic

The recipient SCG can set the rate and any reliefs without needing to consult a higher level government

4.4

The recipient SCG can set the tax rate, and a higher level government does set upper and/or lower limits on the rate chosen.

98.5 95.3

The recipient SCG can set some tax reliefs (tax allowances and/or tax credits) but not tax rates.

0.3

Other cases in which the central government sets the rate and base of the SCG tax.

1.5

Total 100 100

Source> OECD.Stat 2011https://stats.oecd.org/Index.aspx?DataSetCode=REV#

LG grants

• Roughly ¾ of the grants is a block grant (rammeoverføring), according to the ministry’s numbers for 2014

• The block grant is an equalization grant, the aim is to distribute the grant in a way that reduces differences in the level of service provision• Roughly 95% of the block grant is constructed as an equal per capita

grant to all LG’s, but then modified by different spending needs and revenue levels

• A spending need modification is built around cost factors, as the share of old people, children and geography

• An income related modification compensate for 60% of the remaining difference between LGs, up to a limit

• Some smaller components for special purposes constitute about 5% of the block grant

• These components are allocated to small municipalities, municipalities in Northern Norway and rural municipalities in South Norway, municipalities with fast growth and the biggest cities (“storbytillegg”)

Possible effects of the financing system• Reducing local innovation due to the high degree of

equalization

• Giving small municipalities very high incomes per capita – producing both inefficiency and resistance towards municipal mergers

Distribution of LG expendituresLG expenditure 2012 Share in %

Social welfare and elderly care 137285 28,3

Education 113688 23,5

Health 71353 14,7

Transport 39115 8,1

Leisure, culture and religion 27173 5,6

Building and local infrastructure 20719 4,3

Environment, waste 19055 3,9

Police and justice 5169 1,1

Business development 7827 1,6

Other 43217 8,9

Total 484601 100,0

Offentlig forvaltning. Totale utgifter (mill. kr), etter sektor, formål, tid ogstatistikkvariabel

2015

Totale utgifter

Kommuneforvaltningen

01 Alminnelig offentlig tjenesteyting 42 376

02 Forsvar 0

03 Offentlig orden og trygghet 5 269

04 Næringsøkonomiske formål 49 756

05 Miljøvern 20 336

06 Bolig og nærmiljø 22 563

07 Helse 68 857

08 Fritid, kultur og religion 27 977

09 Utdanning 120 547

10 Sosial beskyttelse 142 930

Municipal expenditures – sectors2007

County expenditures – sectors 2007

Norwegian terms explained

• Pleie og omsorg = care

• Grunnskulen= primary schools

• Barnehage = kindergartens

• Sosial, barnevern = social and child care

• Helsetjeneste = health

• Tekniske tenester = building and infrastucture

• Kyrkje og kultur = church and culture

• Bustad, sysselsetjing og næringsliv = buldings and business support

Discretion over use of resources

• Roughly 2/3 of LG grants are block grants, 1/3 earmarked

• The state defines discretion over resources by adding local taxes and block grants. According to this definition, LGs have discretion over 76% of the total budget (2014, ministry estimate)

• Another way of defining discretion is to define it as “fiscal capacity”. This is done by subtracting estimated costs for mandatory services from the total revenue

Restrictions on local government borrowing• Conditions for LG borrowing is covered by section 50 in the

local government act• Loans need to be budgeted in the annual budget and repaid in equal

annual instalments• Loans are for the financing of investment

• Other accepted purposes are conversion of older debt, liquidity loans and loans to ensure full cover in terms of insurance practice for pension funds

• Borrowing has to be reported to the Ministry, for sake of information

• Local governments do not meet any further restrictions on borrowing as far as they make up the budget and account in balance (or at least covers a deficit in the following year), produce a four year plan where payment of interest and repayment of loans is covered, and pay their loans as planned• When the municipality fails to meet one of the requirements

mentioned above, the county governor gets the right to approve loans and long term contracts

• The municipality then is included in the ROBEK register

Public debt – share of GNP

Tabell 5.6. Offentlig forvaltnings bruttogjeld. Prosent av BNP

2006 2008 2010 2013 2014Norge 52,0 46,8 41,7 29,3 25,8Sverige 43,2 36,8 36,7 38,5 39,0Danmark 31,5 33,4 42,9 45,0 47,0Storbritannia 42,5 51,8 76,4 87,3 87,9Tyskland 66,3 64,9 80,3 76,9 74,8Frankrike 64,2 67,8 81,5 92,2 95,3Italia 102,5 102,3 115,3 127,9 131,8Euro-området(18 land) 67,4 68,7 83,7 90,9 92,1EU (28 land) 60,4 60,9 78,2 85,4 86,6

Net assets of public sector, share of GNP

2006

2013

3. kv. 2014

Norway

Sweden

Denmark

UK

Germany

France

Italy

EURO 18

EU 28

-150 -100 -50 0 50 100 150 200 250

Source: Eurostat & CBS

Municipal income and debt 2004/13- fixed 2013 prices

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Increase

Revenue in billion NOK 209 218 233 244 254 274 280 294 313 322 54 %

Net debt in billion NOK* 124 136 143 155 171 188 203 217 233 244 97 %

Debt level 60 % 63 % 62 % 64 % 67 % 69 % 73 % 74 % 74 % 76 %

Source: Riksrevisjonen 2015

Vulnerable municipalities

Distributable reserve

TotalNet operating result < 2 % 2–5 %

< 1 % 27 (37 %)Highlyvulnerable

16 (22 %)Vulnerable

43

1- 3 % 15 (20%)Vulnerable

15 (21 %)Less vulnerable

30

Total 42 31 73 (100 %)

All 73 municipalities in this table have a debt ratehigher than 75% of annual revenue

Source: Riksrevisjonen 2015

Main issues and challenges

• Merits of different financing systems• Program budgeting vs criteria based system

• Monitoring• Can central governments monitoring of local government be built on reliable

data?

• Financial vulnerability in LGs• A matter of weak local practice (too high expenses) or an unbalanced finance

system (too many mandatory requirements)?

• Performance management in local governments• 2/3 of all municipalities report that they use benchmarking data for one or

more tasks (2012, Kommunal organisasjonsdatabase)• Are reliable performance data accessible?• How do municipalities use performance data for management and quality

improvement?