61 Rethinking local government: Essays on municipal reform - VATT

Jens Blom-Hansenin a central <strong>government</strong> agency – like other central <strong>government</strong>transfer payment schemes, e.g. student benefits – but with a thenew organization, Udbetaling Danmark. This is a self-governingorganization with a majority of municipal representatives in itsgoverning board.Budget and account systemsThe third reform is an example of a silent change that has goneunnoticed by the public, but which may have important implications.In the wake of the 1970 municipal reform a standardized municipalbudget and account system was introduced. This was a big stepforward because it made it possible to measure total expenditurespent by the <strong>local</strong> <strong>government</strong> sector and to compare individualmunicipalities with each other on a standardized basis. The systemwas based on the cash flow principle, according to which expenditureis measured when it is spent. This principle favors macroeconomiccontrol because it precisely measures the economic activity impulsefrom the <strong>local</strong> <strong>government</strong> sector. It also makes it easier to estimatetax needs and to plan liquidity usage. In contrast, systems based onthe accrual principle, which measures costs rather than expenditure,make it easier to estimate the precise costs of public production whichis advantageous when, for example, public services are contractedout. The debate about the relative pros and cons of the cash flowand accrual principle is long-standing, and public budget and accountsystems have shifted back and forth between the two principles overtime. For example, in the wake of the breakthrough of Keynesianismafter World War II many countries opted for the cash flow system,which facilitates macroeconomic control policies. Today, manycountries return to the accrual principle because comparisons of publicand private service production, contracting out, and privatization aremore politically salient phenomena (Blöndal, 2003). In Denmark,the central <strong>government</strong> has recently opted for the accrual principle,although with important exceptions (Finansministeriet, 2003). Thesituation in the <strong>local</strong> <strong>government</strong> sector has been discussed between<strong>61</strong>