61 Rethinking local government: Essays on municipal reform - VATT

Lars-Erik Borge – Jørn RattsøThe main challenge of a Nordic model of fiscal federalism is whatto do with the welfare services that are lifted off the shoulders of the<strong>local</strong> <strong>government</strong>s. The natural response is that these services must beprovided by the central <strong>government</strong>, and a new system of governancemust be set up for each of these services. A positive effect of suchcentralization is that the emphasis on equalization can be increasedcompared to the present provision through <strong>local</strong> <strong>government</strong>s. On thenegative side adjustment to <strong>local</strong> conditions and preferences will befurther reduced. A central <strong>government</strong> organization of welfare servicesmay create new bureaucracy and inefficiency. The experiences withcentral <strong>government</strong> nationalization of hospitals in Norway indicatethat this concern should be taken into account.Another common issue in the Nordic countries is the organizationof <strong>local</strong> <strong>government</strong>s in metropolitan areas. The trend is that a largershare of the population resides in the larger cities and as a consequencecommuting areas stretch beyond the borders of the central city. It isan argument for a unified metropolitan <strong>government</strong> in order to handleservices with substantial spillovers such as infrastructure, roads andpublic transport. As in the general discussion of municipal structure,a possible disadvantage is that a unified metropolitan <strong>government</strong>may be “too” large for some services.Overall we expect that the <strong>local</strong> public sector in the Nordic countrieswill survive as a large part of the public sector and within a systemof administrative delegation from central <strong>government</strong>. Local<strong>government</strong>s will continue to be the main service producers of thewelfare state. The conclusion holds as long as broad privatizationof welfare services is out of the question and central <strong>government</strong>is not seen as an efficient organizer of <strong>local</strong> schools, care for theelderly and primary health services. In this case mergers betweenmunicipalities will be part of the package. Larger <strong>local</strong> <strong>government</strong>swill be necessary to carry welfare services that are getting more andmore advanced and to have the revenue base needed to take the bulkof the responsibility for financing and risk. Fiscal discipline andaccountability will still be challenges that the central <strong>government</strong>must handle.37