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More redistribution needed in the municipal financial equalisation system

The municipal financial equalisation system is not designed so that municipalities can provide their populations with an equivalent service level – the Swedish National Audit Office’s audit shows a need to increase the amounts redistributed between Sweden’s municipalities.

Scattered Swedish bills.

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The purpose of the municipal financial equalisation system is for all municipalities to have equivalent financial conditions, despite large differences in tax base, demographics and geography.

Any differences in the municipal tax rate should therefore reflect differences in the level of ambition and efficiency, not varying financial conditions.

The Swedish Riksdag has resolved that Sweden must have an equalisation system, and what purpose it will fulfil. The Swedish National Audit Office (Swedish NAO) has examined whether the system works in compliance with the Riksdag’s decision.

Among other things, the audit reveals that the system does not fully compensate for all cost differences due to varying demographics or geographical conditions – although it is intended to do so.

Municipalities covering a large area, with few inhabitants and a small proportion living in small urban areas are under-compensated in all areas of activity included in the cost equalisation system. According to our calculations, 241 of Sweden’s 290 municipalities are under-compensated.

In 2017, cost differences were equalised by a net amount of SEK 7.2 billion. If the system had worked as the Riksdag intended, the sum should instead have been SEK 10.9 billion.

“Municipal tax rates vary significantly, from SEK 29.18 in Österåker to SEK 35.15 in Dorotea. The Swedish NAO’s assessment is that this is to a large extent because the cost equalisation system does not work as intended,” says Auditor General Helena Lindberg.

The Swedish NAO notes that the Government recently submitted a bill proposing that the cost equalisation system be developed in the same direction as recommended by the Swedish NAO. The Riksdag is processing this bill at present.

If the Riksdag votes in favour of the Government's proposal, redistribution will increase to SEK 9.3 billion in 2020. The Swedish NAO’s calculations show that this is insufficient to address the identified shortcomings, since costs are still systematically underestimated in municipalities covering a large area, with few inhabitants and small urban areas.

“In order for the system to function in accordance with the Riksdag’s intentions, redistribution needs to increase more than the Government is proposing. To do this, better reference data needs to be produced showing the costs of municipal services in areas with more scattered population centres,” says Ulf Andersson, project leader for the audit.

Recommendations

The Swedish National Audit Office recommends that:

  • cost equalisation is developed so that it to a greater extent compensates cost differences arising due to the area covered by the municipalities, the number of inhabitants and population changes, as well as socio-economic factors in metropolitan areas and municipalities close to large cities.
  • the system also covers library services and municipal adult education
  • the Government investigates the advantages and disadvantages of expanding the cost equalisation system to include a greater number of tax-financed services
  • the Government considers whether parts of the structural grant can be phased out
  • the Government tasks the Swedish Agency for Economic and Regional Growth with managing the equalisation system.

Footnote: The Swedish NAO has examined the financial equalisation system for municipalities, but not the corresponding system for county councils and regions.

Press contact: Olle Castelius, phone: +46 8-5171 40 04.

Presskontakt: , telefon: 08-5171 42 06.

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Updated: 19 November 2019

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