Territorial Review Copenhagen - Region Hovedstaden

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OECD country. In a majority of countries, borrowing needs prior approval
of another government tier, or is restricted to certain purposes. In several
OECD countries, there are no restrictions on access to sub-national
borrowing. Danish municipalities can in certain limited cases acquire debt
for investment. The general law and the yearly agreement between the
national government and the municipalities and regions specify the areas
where the sub-national governments are allowed to acquire debt. As a
general rule, the municipalities are allowed to acquire debt to finance
investments in supply companies (like renovation companies, etc.) as long
as the expenses and the revenues for these companies are neutral in the long
run. The central government uses certain budget safeguards to ensure that
revenue fluctuations do not become too large. Danish municipalities can
own public enterprises and utilities; there are additional limitations on
borrowing by and from these enterprises. Local governments in Denmark
used sale-and-lease-back operations to circumvent borrowing restrictions,
but the Danish central government has revised its definition of borrowing to
include renting and leasing arrangements (Pedersen, 2002). This also
prohibits the use of PPPs.
Not surprisingly, Denmark scores very high on several benchmarks for
sub-national fiscal discipline. It has the highest score of OECD countries on
the Advisory Commission on Intergovernmental Relations (ACIR) index for
budget balance stringency, it has one of the lowest scores under the Inter-
American Development Bank (IADB) sub-national borrowing autonomy
index and one of the highest scores on the OECD composite sub-national
fiscal discipline index – and the highest score on its sub-index on budget
balance and borrowing constraints.
The econometric evidence on the impact of borrowing constraints on
sub-national fiscal policy has so far been limited and mixed, ranging from
increased indebtedness, no effects to some effects (Singh and Plekhanov,
2005). Losses in aggregate efficiency are a potential problem with budget
balance requirements and borrowing constraints. Hard budget constraints
can be too ―hard‖ and discourage investment that is socially efficient
(Besfamille and Lockwood, 2004). Significant allocative inefficiencies may
occur because a rule that covers total spending may be biased against
investment, since capital spending is easier to change than current
expenditure in the short term. It has been observed that Danish
municipalities, because they are severely constrained by borrowing
restrictions, achieve consumption smoothing through adjustments in
investment activity (Borge et al., 2001).