Financing of the sector

Financing the municipal sector and the sector’s place in the Norwegian economy.

Financing the municipal sector and the sector’s place in the Norwegian economy.

The municipal sector has a wide responsibility for welfare services for the country’s people and therefore administers a significant percentage of the country’s economic resources. The municipal sector’s revenues represent approximately 18 per cent of mainland Norway’s GDP. Every fifth employed person in the country works in the municipal sector.

The state’s economic control of the municipal sector occurs partly through a fixed framework for transfers from the state to the municipalities and partly through regulating the municipalities’ opportunities to acquire revenues. This means that the state largely controls the overall framework for municipal economies.
The municipal sector’s use of resources is substantially linked to responsibility for national welfare services. Kindergartens, schools and the health and social sector account for nearly 80 per cent of the municipalities’ gross operating expenditure.

The municipalities’ revenues consist mainly of three sources of income: tax revenues, transfers from the state and income from charges (including user payment). The transfers are partly general and partly earmarked for special purposes. Tax revenues are largely income tax from persons. The municipalities are also able to collect tax on property and some municipalities have considerable financial and owner income from power stations. Tax revenues and general grant are unrestricted income and represent about ¾ of the municipal sector’s total income.

Development of the welfare state and the need for equalisation
The overall goal for the development of the welfare state has been that the welfare services shall reach everyone and that there shall be no great variation in the standard of the services around the country. The goal of equalisation has, in line with the development of the welfare state, been characterised as an overall national goal. It is the unrestricted income (tax revenues and general grant) that are subject to equalisation and redistribution in the financing system for the municipalities.
There are great differences in the basis for income in the different municipalities. Without equalisation of income between the municipalities, the variations in tax revenues would result to a great extent in  variations in municipal services. The state, through its equalisation policy, helps to ensure that services do not vary too much between municipalities. The municipalities, for their part, shall ensure that public welfare services are available to the whole population regardless of where they live.

The state has control over the municipal sector’s regulatory framework through adjusting funding, the equalisation system and legislation and regulations. The formulation of the equalisation policy is therefore of great significance for the municipalities’ economies. The income system that was introduced in 1986 was primarily grounded on the desire to ensure a fair distribution, to motivate to better use of resources by extending local self determination, to stimulate local democracy and regional development and to improve macro-economic control of the sector’s income framework.
In the current income system, tax revenues are partly equalised, while variations in the demand for services because of social, demographic and distance factors shall be fully equalised by means of expense equalisation.

Responsibility and room to manoeuvre
Every task to be performed by the public sector must be placed in a given level of administration, based on what level is considered to be best placed to perform the task in question. The nearness between those who take political decisions and those affected by them is an important aspect of local democracy and performing tasks locally.  The effective use of resources is a key argument for performing tasks as close to the residents as possible. Essentially, local adaptations and priorities can facilitate both the effectiveness of prioritising and cost effectiveness.

There is a need for coordination of the different municipal agencies so that residents shall receive the best possible services, and collaboration can often be achieved more easily at a local level. National standardisation, economies of scale and the need for specialist expertise indicate a more centralised organisation for some services. There will also be a need for collaboration between municipal and national agencies. On the other hand, nearness between the decision maker and the person affected by the decision is important for ensuring that each resident shall receive a full range of services in his or her local environment.
Municipal autonomy is often based on the desire for a close connection between the decision makers and those affected by the decisions. It is an important precondition for real and properly functioning local democracy that there is a connection between responsibility, tasks, authority and financing responsibility. The municipal sector must be ensured a stable income so as to finance nationally decided welfare benefits. In addition, the municipalities must have a certain amount of economic room to manoeuvre in order to perform local social development and to be a local democratic arena.

The municipal sector’s free income is made up of taxes from its own residents and general grant from the state. Unrestricted income is income that the municipality is free to use with no restrictions other than applicable laws and regulations.

There is a goal that the municipal sector shall be mainly financed with unrestricted income (framework financing). Unrestricted income facilitates local adaptation and prioritising of statutory welfare services and actual execution of political power at local level. One municipality may give schools a high priority, while another prioritises care for the elderly. Framework funding also facilitates the effective production of services that are well suited to the needs of residents. In order to produce services of good quality within a given framework of resources, local politicians must weigh up the needs of residents and ensure the effective utilisation of resources.

The municipality as social developer
The municipalities have an important role as developers of local communities. Social development is about planning, commercial development and the environment in the widest sense, for example improving the local road network, creating jobs and a good local environment. The social developer role involves all-round work to develop trade and industry and create good living conditions for residents, in the widest sense. The funding transferred to the municipal sector is of great significance for local and regional development. The way in which the social developer role is exercised will be dependent on laws and regulations, national initiatives, land use development and administration and not least coordination between state and municipal authorities. A municipality’s economic room for manoeuvre will also be significant for the exercise of the social developer role.
Interaction between state and municipality
Within the framework of the Norwegian municipal model, it is not possible to make a sharp distinction between the state and the municipal sphere. Good interaction and collaboration between levels is an important prerequisite for this model. It is a challenge to create good solutions that result in good services. The municipalities are responsible for offering the nation’s citizens national welfare services such as schools, health and care services and kindergartens. The municipal sector is controlled on one hand by decisions taken by locally elected representatives and on the other hand by tasks and duties delegated by the state. If municipalities are to be a living local democratic arena, state control and municipal room for manoeuvre must be balanced.

Discussion of the quality of municipal welfare services is central to national political debate. When the state, through the government, takes decisions on national reforms of the tasks and duties of the municipal sector, this has direct consequences for the municipalities’ room for manoeuvre. The municipalities are restricted to prioritising some services before others, thus limiting their freedom to prioritise locally. State reforms that involve new tasks or extended responsibility are normally followed up with increased funding transfers.

The desire for equal services in all the country’s municipalities does not contrast with local self determination. Local policy should be more than an execution of state policy. It should be possible to find a balance between the requirements of the larger society for equality of services and the municipalities’ room for manoeuvre.