61 Rethinking local government: Essays on municipal reform - VATT

Lars-Erik Borge – Jørn Rattsørestrictions. The states generally have balanced budget requirementsand limitations on debt, but in different forms. Von Hagen (1991) didan innovative study of how these rules affect state indebtness. Themotivation for his study was the discussion about European monetaryintegration and the use of fiscal restraint. The US case represents anopportunity to investigate how fiscal restraints in a monetary unionare functioning. His main conclusion is that fiscal restraints ‘do littleto reduce the likelihood of extreme outcomes in fiscal performance’and thus that they cannot be expected to be effective in a Europeanmonetary union.Poterba (1997) summarizes the many studies available about US statesand classifies three main types of regulations: Required submissionof a balanced budget; required legislative decision of a balancedbudget allowing for actual deficits; combining a balanced budgetfrom the legislature with a prohibition to carry forward the deficit.The empirical analyses apply an index of the stringency of the state‘sbalanced budget requirements. Most contributions estimate broadmodels of economic and political variables affecting spending andrevenue behaviour. The analysts agree that the most restrictive fiscallimits do reduce the state indebtness and also reduce the borrowingcosts for a given deficit. The lessons above indicate that nationalrestrictions only work when they are part of a well-functioning androbust political decision making system.2.5 The Nordic model of administrative federalismThe Nordic countries have developed a model of fiscal federalismcharacterised by <strong>local</strong> responsibility for welfare services, <strong>local</strong> taxfinancing through an income tax, and extensive equalization systems.Overview and discussion are offered in Rattsø (1998).The background for the development of a Nordic model is the buildingof the welfare state after World War II. Key elements in the buildingof the welfare state were expansion of education, health care, andsocial services and with the same service standards throughout the27