Many countries apply cost-equalization and/or fiscal capacity equalization formulas to enable sub-national governments to provide comparable service standards at comparable tax rates. This paper demonstrates how measures of expenditure needs and fiscal capacity can be derived from a structural model of local government spending and taxing behavior. The structural parameters are shown to provide the information required to implement equalization according to the principle of horizontal equity.
When private goods are publicly provided, government authorities have to determine the distribution of services on recipients. In this paper, the public service provider is assumed to maximize utility defined over service supply to different target groups, given a budget constraint. The production technology is target group specific and depends on the ability of each target group to produce service outcomes. Three benchmark allocation principles are identified: equality of treatment (ET), equality of outcome (EO) and equality of marginal cost (EMC). These principles can be considered to be consistent with special cases of a public preference model, which allows for compromises between different allocation principles. The condition of technological dominance implies that there is a clear-cut equity-productivity trade-off, whereas violations of this condition may reduce the significance of the trade-off.
When private goods are publicly provided at subsidized prices, government authorities have to determine the distribution of services on recipients. Such distributions are commonly based on legal regulations and professional guidelines. Thus governments are assumed to develop service standards that are incorporated in the preferences for allocation of services. The purpose of this paper is to analyse the behavior of local governments when they are allocating home-care services on elderly and disabled clients. Based on Norwegian data it is demonstrated that service standards as well as economic constraints have an impact on the supply of home-care. As expected the supply to individual clients increases with the degree of disablement. The model estimates also show that service standards vary substantially between different client groups. For instance, service levels for mentally retarded are rather high compared to elderly clients in non-single households. Individual service standards are derived from observed behavior by means of model simulation, where the standards are defined for an average level of municipal incomes and prices. The results are used to evaluate the degree of mismatch between service supply and common service standards in different local communities.
An extended community preference model including real and financial investments is estimated on accounting time-series data for the local public sector in Norway. The estimation results indicate considerable sluggishness in local public spending, both in current expenditure and investment spending. A positive shift in grants or taxes will in the short run lead to reductions in the net debt, due to the sluggish spending adjustment. But as spending adjustments take place, the effect on the net debt is reversed, so the long run effect is positive. The long run elasticities of factor demand and net debt with respect to exogeneous income constraints do not differ significantly from unity. The estimated price elasticities suggest that factor demand is close to neutral-elastic in the long run. Higher factor prices involve higher production costs, and local authorities are thus induced to increase user charges.
A cooperative bargaining model is adapted to the setting of local government in Norway. Aggregate consumption, the capital stock and net financial wealth in the local public sector are endogenized. The origin of intertia in the model is ascribed to incrementalism or adjustment costs in the disagreement points of the Nash solution. Using the method of ordinary least squares, the model is estimated on sample data for the period 1973-1991. Different hypotheses regarding the disagreement point formation are tested, and the pure incrementalist model is encompassed by a more general partial adjustment model, implying that some other mechanism than just preservation of the status quo is operative. It is found that local government consumption, the capital stock and the net debt in the long run are stabilized relative to disposable income. Finally, results form model simulations are reported.
Governments that pursue welfare and equalization goals frequently target cash transfers to individuals that suffer from limited economic opportunities and poverty. To achieve the desired allocation of welfare benefits, evaluation of individual needs is thus required. However, the political support for redistribution may vary across communities and governments, depending on ideology of the dominant political parties, political power of interest groups, and geographic, cultural and social diversity within the community. The purpose of this paper is to analyze the allocation of social assistance to individuals by local governments in Norway. Available data on individual characteristics as well as variables at the municipal level allow us to separate the impact of individual needs from the impact of different local government treatment. The results show that priorities across individuals are affected by characteristics that capture individual economic opportunities and needs, whereas theories that suggest different priorities between local governments find little support.
The purpose of this paper is to provide an evaluation of how local public in-kind benefits affect the distribution of income in Norway. To this end, a method that accounts for differences between municipalities in capacity to produce the same standard of public services is used for assessing the value of sector-specific local public services in each municipality. Next, the underlying justification of the various services is used as basis for determining the allocation of the assessed value of the services on the citizens in the municipalities. For instance, services like health care and care for the elderly and disabled are treated as an insurance arrangement. Thus, the corresponding in-kind benefits are allocated on the potential recipients. By contrast, the value of the production of education and child care is allocated uniformly on the families that receive these services. The empirical results show that the inequality in the (marginal) distribution of municipal in-kind benefits is rather high. The contribution of in-kind benefits to inequality in the distribution of extended income (cash (after-tax) income plus municipal in-kind benefits) is, however, approximately neutral. This result is due to the fact that elderly people and families with children receive the largest share of the municipal in-kind benefits and moreover are located in the central part of the distribution of extended income.
Fiscal disparities arise from differences in costs and capacity to produce a standard package of public services. This paper proposes to use a structural modelling approach as basis for measuring fiscal disparities across municipalities. This approach differs from the widely used reduced-form approach, in the sense that identification of minimum required costs or expenditure need is made by reference to a structural model of the fiscal and spending behavior of local governments. The empirical analysis, which is based on data for Norwegian municipalities, relies on various alternative measures of fiscal capacity. One of these measures is defined by the local tax-bases, whilst another also includes grants-in-aid from the central government. This facilitates identification of the equalizing effect from grants. By comparing the effects of the current grant system with the effects of a policy designed to reduce fiscal disparities it is demonstrated that the goal of locational neutrality is far from being fulfilled. Moreover, it is shown that differences in local priorities only give a minor contribution to the observed differences in service levels.
This paper treats local governments as utility maximizing agents when they allocate resources among different service sectors. We present estimates for eight service sectors, based on a modified version of the extended linear expenditure system (ELES) and using observations at the municipal level for Norway. Our econometric model recognizes user fees and budget deficits as endogenous variables. Moreover, the model accounts for heterogeneity in local tastes and production costs. Price information for local public services is not available in the data. However, by allowing for heterogeneity in the marginal budget share parameters, we achieve identification of the complete ELES. The empirical results show that local public services are in general price-inelastic. Welfare services like education, social services and care for the elderly and disabled are income-inelastic, while infrastructure is rather income-elastic. A strong flypaper effect is revealed by the response of user fees to income changes. Finally, results from out-of-sample predictions show that the ELES model is able to simulate local government behavior quite well.
Formålet med denne artikkelen er å belyse hvordan inntektsulikhet og fattigdom varierer mellom europeiske land, når verdien av offentlige tjenester inngår i inntektsbegrepet. De tradisjonelle fordelingsstudiene basert på inntekt etter skatt gir et ufullstendig bilde av den økonomiske situasjonen til individer og hushold fordi det ikke tas hensyn til at den inntektsskatten innbyggerne betaler kommer tilbake til husholdene i form av utdanning, helse og andre offentlige tjenester som er gratis eller sterkt subsidiert. Fravær av skattefinansierte offentlige tjenester ville ha medført at innbyggerne i stedet måtte ha kjøpt disse tjenestene i markedet. Derfor vil det være relevant å sammenligne resultatene for utvidet inntekt (inntekt etter skatt pluss verdien av offentlige tjenester) med en hypotetisk situasjon (kontrafaktisk inntekt) der innbyggerne må kjøpe tjenestene i markedet, samtidig som de slipper å betale skatter som finansierer de offentlige tjenestene. Vi presenterer resultater for økonomisk ulikhet og fattigdom i perioden 2006 til 2015 i 23 europeiske land. For alle 23 land finner vi at ulikhet og fattigdom blir betydelig redusert når det tas hensyn til verdien av offentlige tjenester.
We examine how in-kind transfers provided by local governments affect economic inequality. The allocation of in-kind transfers to households and the adjustment for differences in needs are derived from a model of local government spending behavior. The model distinguishes between fixed and variable costs in production as well as mandatory programmatic spending components versus discretionary spending on different service sectors and target groups. To estimate the model, we combine Norwegian data from municipal accounts and administrative registers for the period 1982- 2013. We find that economic inequality is considerably lower when taking in-kind transfers into account. While the poor benefit from receiving a relatively large share of public services, the equalizing effect of in-kind transfers tends to be smaller than the equalizing contribution from public cash transfers. When examining the time trends in inequality, we find that local governments attenuated the growth in cash income inequality by re-allocating in-kind transfers to low-income families. This reduction in inequality is mostly due to changes in spending priorities across service sectors and target groups, whilst the contribution from re-allocation of resources across municipalities is much smaller.
Despite a broad consensus on the need to take into account the value of public services in distributional analysis, there is little reliable evidence on how the inclusion of such non-cash income actually affects poverty and inequality estimates. In particular, the equivalence scales applied to cash income are not necessarily appropriate when including non-cash income, because the receipt of public services is likely to be associated with particular needs. In this paper, we propose a theory-based framework designed to provide a coherent evaluation of the distributional impact of local public services. The valuation of public services, identification of target groups, allocation of expenditures to target groups, and adjustment for differences in needs are derived from a model of local government spending behaviour. Using Norwegian data from municipal accounts and administrative registers we find that the inclusion of non-cash income reduces income inequality by about 15 percent and poverty rates by almost one-third. However, adjusting for differences in needs for public services across population subgroups offsets about half the inequality reduction and some of the poverty decrease.
