Financial management of local authorities in Sweden

Problems of scale

Björn SundströmSALARbjorn.sundstrom@skl.se

2

Municipalities and county councils/regions

Municipalities290

20 County councils (21 Counties)

Local government expenditure

0,00%

10,00%

20,00%

30,00%

40,00%

50,00%

60,00%

70,00%

Percent

% of GDP % of gen gov expenditure

Source: Eurostat, national sources and DEXIA calculations

Composition of local government revenues

Source: Eurostat, national sources and DEXIA calculations

0,00%

10,00%

20,00%

30,00%

40,00%

50,00%

60,00%

70,00%

80,00%

90,00%

100,00%

Percent

Local taxes Other rev Gov. grants

Local govenment tax revenue

Source: Eurostat, national sources and DEXIA calculations

0,00%

10,00%

20,00%

30,00%

40,00%

50,00%

60,00%

70,00%

80,00%

Percent

Incometaxes Property taxes Consumption taxes

6

Breakdown of municipalities’ costs for activities

Problems of scaleThe smaller the municpialities are the higher are the

costs per capita (SEK per capita)

30 000

35 000

40 000

45 000

50 000

55 000

60 000

0 - 4999 5000 - 9999 10000 - 14999 15000 - 19999 20000 - 29999 30000 - 49999 50000 - 99999 100000 -199999

200000 -

SEK/capita

Municipalities by size

Costs for elderly care, infrastructrure and politics are especially high in small municipalities

0

5 000

10 000

15 000

20 000

25 000

200000 - 100000 -199999

30000 -49999

50000 -99999

20000 -29999

15000 -19999

10000 -14999

5000 -9999

0 - 4999

Cost per capita (SEK) for elderly care by size Cost per capita (SEK) for political activities by size

Cost per capita (SEK) for infrastructure by size

0

500

1 000

1 500

2 000

2 500

3 000

3 500

4 000

4 500

5 000

200000 - 50000 -99999

100000 -199999

30000 -49999

10000 -14999

15000 -19999

20000 -29999

5000 -9999

0 - 4999

0

200

400

600

800

1 000

1 200

1 400

200000 - 100000 -199999

50000 -99999

30000 -49999

20000 -29999

15000 -19999

10000 -14999

5000 -9999

0 - 4999

We live in a new economic geography!The connection between the size of the

labour market and the number of growing municipalities

03 4

25

66

0

10

20

30

40

50

60

70

<10' 10'–50' 50'–100' 100'-500' >500'Arbetsmarknadens storlek/folkmängd, tusental

Antal

växa

nde k

ommu

ner

Size of the labour market regions

Number ofgrowingMunicip.

Småkommuner 2004Norrlands inland (12)Övriga i skogslän (16)Övriga i Syd- och Mellansverige (16)Stadsnära i Syd- och Mellansverige (18)Storstadsnära (12)

Småkommuner 2030Norrlands inland (17)Övriga skogslän (22)Övriga i Syd- och Mellansverige (27)Stadsnära i Syd- och Mellansverige (28)Storstadsnära (13)

Small today Small tomorrow

How to handle the challenges

• Delegated functions

• Inter-municipal cooperation

Development of local government income tax rate 1930–

0%

5%

10%

15%

20%

25%

30%

35%

1930

1933

1936

1939

1942

1945

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

Year

Perc

ent

Total local government tax Municipality tax

County council tax Total local government tax, incl. church tax

Elderly care reform

Boundary reforms in Sweden (municipalities)

- 1862-1951- 1952

- 1962

1962-1969

- 1969

- 1974

- 1977-2012

- 2400 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 68 000 SEK per capita.• Borgholm obtain a tax income of 28 000 SEK per capita.• All municipalities need approx. 41 000 SEK per capita

Income equalisation for municipalities, outline diagram

Why cost equalization?Cost per capita in different agegroups

0

50 000

100 000

150 000

200 000

250 000

300 000

0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99kr/inv

Kommunal grundkostnad Övriga kostnader Barnomsorg och skola Äldreomsorg

Level of charge-financing in municipal tax-financed activities

Level of charge-financing in municipal business activities

0,0% 10,0% 20,0% 30,0% 40,0% 50,0% 60,0% 70,0% 80,0% 90,0% 100,0%

Communications

Electricity and gas supply

District heating

Water and sewerage

Waste management

Total

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 reforms1. Have focus on the challenges to be solved2. Criteria for distribution of responsibilities have

to be discussed3. Overall vision and strategy4. 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

0186

00

100000

300000

413000

414000

586000

587000

600000

700000

0%

10%

20%

30%

40%

50%

60%

Extra State tax on incomeState tax on incomeMunicipal tax on income

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

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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

0,00%

10,00%

20,00%

30,00%

40,00%

50,00%

60,00%

70,00%

80,00%

90,00%

100,00%

Percent

Local taxes Other rev Gov. grants