61 Rethinking local government: Essays on municipal reform - VATT

Jens Blom-Hansen3.7 Challenges since 2007: Controlling <strong>local</strong>expenditureControlling the municipalities’ expenditure has been the mainchallenge in the years after the 2007 reform; partly because <strong>local</strong>expenditure rose dramatically in the first years after the reform, partlybecause the financial crisis from 2009 made control more salient forthe central <strong>government</strong>. The <strong>government</strong> has met this challenge byintroducing ever tighter control of <strong>local</strong> economic dispositions.Controlling expenditure in the <strong>local</strong> <strong>government</strong> sector is no newchallenge for the Danish central <strong>government</strong>. Ever since the 1970municipal reform, <strong>local</strong> <strong>government</strong>s have been responsible for alarge share of the Danish public budget. Macroeconomic control hastherefore for a long time been difficult without some coordinationof <strong>local</strong> economic dispositions with the central <strong>government</strong>’smacroeconomic policy goals. The Danish solution to this challengehas been a system of annual negotiations and agreements betweenthe central <strong>government</strong> and the municipalities’ national association(Kommunernes Landsforening) and the regions’ national association(Amtsrådsforeningen before 2007, Danske Regioner after 2007), theso called budgetary cooperation between central, <strong>local</strong> and regional<strong>government</strong>. The annual agreements contain guidelines for the overallexpenditure and taxation level in the municipal and regional sector.During the reform years 2004–2007 this negotiation system wasformally kept intact, but in reality control of <strong>local</strong> expenditurewas achieved by strict legal regulation by the central <strong>government</strong>.To counter a flurry of unsound economic dispositions before theamalgamations, the central <strong>government</strong> introduced a number ofcontrol measures, including central approval systems for <strong>local</strong>investments, obligatory saving schemes for socalled surplusliquid means (i.e., liquid means above a certain amount), approvalsystems for supplementary appropriations, fees on supplementaryappropriations, and <strong>local</strong> tax freezes. It is not easy to evaluate howsuccessful these measures were. It is unquestionable that some71