The Swedish Agency for Public Management
Meny

Municipal equalisation since the mid-1990s – its development, functioning and problem areas (2013:19)

Purpose and content of the report

The purpose of the Swedish system of equalisation in municipal finances is to create the financial conditions necessary for local government to be able to offer a similar level of service to their residents in all parts of the country, regardless of varying income levels and other structural factors. Differences in municipal tax are primarily intended to reflect differences in efficiency, in levels of services and charges, and not be due to differences in structural conditions. The Swedish system of equalisation in municipal finances consists of five parts: revenue equalisation; cost equalisation; structural assistance; a regulatory grant or fee and a transitional grant.

This report describes and analyses the development of municipal equalisation since the mid-1990s. The report forms part of the Government's assignment to Statskontoret (the Swedish Agency for Public Management) to follow up the system of equalisation in municipal finances.

The report has four purposes:

  • To present the development of the system of equalisation in municipal finances since the mid-1990s
  • To increase understanding of the functioning of the system of equalisation in municipal finances
  • To identify any problem areas within the system of equalisation in municipal finances
  • To propose which areas of the equalisation system should primarily receive further examination in order to subsequently propose updates and improvements to the functioning of the equalisation system

More equal opportunities to finance municipal services

As with many other reports and studies, the present report shows that the system of equalisation is of great significance to the financing of municipal services and contributes significantly to the equalisation of financial resources between municipalities and between county councils. In 2013, central government contributed SEK 85.6 billion to local government, which represents 10.8 per cent of the local government sector's expenditure and just over 4.5 per cent of the local government tax base for 2013.1 Most of the redistribution of resources between central government and the local government sector takes place through revenue equalisation. Cost equalisation is budget neutral in relation to central government, that is, it is a system for redistributing resources between municipalities and between county councils. The report shows that the significance of the equalisation system for individual municipalities, municipality groups and county councils varies markedly. The equalisation system is of greatest significance for sparsely populated municipalities and the county councils of Norrland, but is also very important for individual local governments in other parts of the country.

Grants and fees within the system of equalisation in municipal finances in 2013, SEK billion

  Local gov't sector Municipalities County councils
Revenue equalisation grants 86.2 59.6 26.6
Revenue equalisation fees - 4.9 - 4.5 - 0.4
Cost equalisation grants 8.1 6.5 1.6
Cost equalisation fees - 8.1 - 6.5 - 1.6
Structural assistance 2.2 1.5 0.7
Regulatory grants 4.6 4.6 -
Regulatory fees - 2.5 - - 2.5

Total central gov't appropriations
Percentage of GDP

85.6
2.3
61.2
1.6
24.4
0.7

Source: Statistics Sweden (SCB) and The Swedish Economy (Konjunkturläget) June 2013, National Institute of Economic Research.

Revenue equalisation

Changes to the system have affected the outcome

The system of equalisation in municipal finances has been subject to a series of changes since the mid-1990s. Within the system of revenue equalisation, two significant changes took place in 2003 and 2005. In 2003, the budgeting system for VAT was changed so that municipalities were compensated for VAT expenditure directly from the revenue side of the central government budget. The result of this change was that the then general central government grant was reduced by about SEK 22 billion. A significant structural change took place in 2005 when revenue equalisation was altered through the incorporation of the general central government grant – previously payable in terms of SEK/resident – into the revenue equalisation system.

The distribution of net contributions from/to revenue equalisation among municipalities has been stable since 2005. This may in part be inferred by studying the distribution and development of the number of municipalities that receive revenue equalisation fees and municipalities that pay revenue equalisation grants.

1 Forecast for the local government sector's total expenditure in 2013, according to the National Institute of Economic Research's forecast in August 2013.

Significant equalisation effect

Different distribution metrics show that the revenue equalisation system greatly helps to compensate differences in tax capacity and thereby to equalise the capacity to provide municipal services.

Employment affects tax capacity

Tax capacity varies considerably between municipalities and between different parts of the country. The revenue equalisation system increases the ability of most municipalities to finance municipal services. Revenue equalisation compensates for differences in tax capacity between municipalities and between county councils at the same time as central government, through revenue equalisation, generally contributes resources to the local government sector. The report illustrates the link that tax capacity has with employment, industry structure, education level and age composition in the municipalities.

Revenue equalisation and growth – still a research issue

From time to time, there has been discussion of the municipal equalisation system's impact on growth in the economy. The report briefly summarises international theoretical and empirical research that illustrates how municipal equalisation systems may affect factors such as tax bases and tax rates. Statskontoret has found no empirical studies analysing the impact of the municipal equalisation system on GDP growth. There are empirical studies showing that revenue equalisation, which compensates lower tax capacity, contributes to reduced tax competition and to upward pressure on municipal tax rates. The estimated effects are however relatively small. Research in economic theory shows that the system of revenue equalisation may have a negative impact on tax bases, but there are no estimates of how great these effects might be.

The significance of revenue equalisation systems' impact on different growth factors can be considered an open question. This is partly because existing empirical research is limited and partly because it is difficult to analyse the effects of municipal and regional equalisation systems in purely methodological terms.

Cost equalisation

Statskontoret's report analyses the outcome trends in cost equalisation for municipalities and for county councils since the mid-1990s. The analysis is performed both for the overall outcome and for the outcome of the different model components. For the models accounting for the largest redistribution of resources, we also perform in-depth analyses of the change in outcome at the component or variable level between 2005 and 2013.

Using a regression analysis, we study factors that may be expected to be of particular importance to the overall outcome of cost equalisation in the municipalities.

Redistribution has declined

The amounts redistributed in the cost equalisation system have dropped during the period 1996–2013, both with respect to municipalities and to county councils. For municipalities, the system redistributed approximately SEK 7.8 billion in 1996 and in 2013, approximately SEK 6.6 billion in 2012 prices. The redistribution for county councils was approximately SEK 5.9 billion in 1996 and in 2013, approximately SEK 1.5 billion in 2012 prices. Looking at the whole period, we find that the system in the form it had before 2000 redistributed a little more on the municipal side and considerably more on the county council side.

The difference between the highest grant and the highest fee has decreased during the period 1996–2013. This is because the highest grants in the cost equalisation system, which in the late 1990s and early 2000s were around SEK 15 000–16 000 per resident, have now dropped to around SEK 10 000 (all in 2012 prices). For county councils, the difference between the highest grant and the highest deduction has almost halved during the period.

Those receiving grants and paying fees have varied

In the cost equalisation system for municipalities, the number of municipalities receiving grants and the number paying fees have varied relatively greatly over time. During the first years studied, there were far more municipalities paying into the system: in 1996, 183 of 288 municipalities were fee payers. In recent years, the number of municipalities paying fees and receiving grants has been roughly equal. The majority of county councils have been fee payers during most of the period in question.

Significant redistributions between different municipality groups/county councils

The system sees relatively significant redistributions between the different municipality groups. The group Metropolitan cities receives grants throughout the period, but the grant has declined over time. The group that receives the highest grant per resident is Sparsely populated municipalities. The group Suburban municipalities to metropolitan cities has gone from being a fee payer to being a grant recipient. The groups Large cities and Suburban municipalities to large cities have been fee payers throughout the period.

With respect to county councils, there are five that were net payers in the cost equalisation system throughout the period studied, that is, Uppsala, Östergötland, Jönköping, Kronoberg and Halland. However, there are only two county councils that were grant recipients throughout the period, Västerbotten and Norrbotten.

A few models account for most of the redistribution

The diagram below shows the redistribution in the different cost equalisation models for municipalities for the period 1996–2013.

Diagram showing Redistributed resources in the different cost equalisation models, SEK billion in 2012 prices

There are four models that account for the majority of the amount redistributed between municipalities. The elderly care model, which accounts for the largest redistribution throughout the period, has redistributed approximately SEK 7 billion annually (in 2012 prices). The individual and family care model (IFC) redistributes substantial amounts. After this come the models for childcare and compulsory school.

With regard to variations over time, it is primarily the IFC model that has varied greatly. It may also be noted that the childcare model and the upper secondary school model are redistributing increasing amounts.

With regard to cost equalisation for county councils, the total redistribution was significantly greater prior to 2000, at which time came the introduction, among other things, of the current healthcare model. The change in that year resulted in the redistribution falling from just over SEK 5 billion to just over SEK 1.5 billion per year.

Future follow-up

Statskontoret's report also presents observations and issues concerning more than one individual model in the cost equalisation system. These relate to more general observations and issues about the models' purpose, delimitations, design or calculations based on previous investigations and other documentation.

Examples of overarching model factors that should be monitored in the future follow-up of the cost equalisation system are: controllable variables and the effect of different levels of ambition; constants, price tags and data documentation that must be updated; threshold effects or maximum and minimum values; complicated calculation models and problems with data documentation for certain variables.

Statskontoret further assesses that the models in the cost equalisation system that should primarily be reviewed are the models for public transport and individual and family care (IFC). These are two models that redistribute large amounts and that have problems in need of urgent resolution. With regard to public transport, these include deficiencies in the cost base and, with regard to the IFC model, controllable variables.

According to Statskontoret, it is also natural in 2014 to describe and analyse the differences in outcome that arise after the changes to be implemented in the equalisation system from 2014. The purpose of such a review includes identifying and investigating any significant differences in outcome that are difficult to explain on the basis of the changes.