No evidence that the local income equalisation system hampers municipal growth
The purpose of the local income equalisation system is to increase the abilities of the municipalities to provide equivalent services. There is a long-standing concern that the system hampers the growth ambitions of municipalities. The Swedish National Audit Office’s audit shows that there is no empirical evidence for this.
The income equalisation is financially the largest part of the municipal equalisation system, which was formed to enable all municipalities to provide equivalent services.
Based on economic theory and various international research studies, it has been argued that the system can lead to municipalities lowering their growth ambitions. The reason is that increased income among the municipal residents leads to reduced grants from the income equalisation.
To see if this is the case, the Swedish NAO has analysed the effects of three reforms between 2001 and 2014 that lowered the degree of equalisation for a set of municipalities. The audit shows that there is no empirical evidence that the income equalisation has the negative effects as feared.
Yet, the Swedish NAO also notes that the complexity of the local income equalisation system, combined with methodological difficulties, means that there neither is any unambiguous evidence of the opposite.
“However, from the audit we can see that the aim of local growth investments is broader than merely to increase the tax base. And municipalities often cooperate with one another on growth issues. A possible way forward is to dig deeper into local growth investments and into the mechanisms underlying local growth,” says Heléne Berg, project leader of the audit.
Recommendations in brief
Given the lack of evidence regarding whether the local income equalisation system has negative effects on municipal growth, the Swedish NAO recommends that the Government analyses this comprehensively and continuously. The Government should also ensure that there are good conditions for evaluating future reforms in the income equalisation.
“The consequence of the lack of evidence on the side effects of the income equalisation on growth, is that it is not possible to know whether the system is designed appropriately. Nor is it possible to know what consequences any changes done to the system may have on growth,” says Auditor General Helena Lindberg.
Please see the report for the full recommendations.
The municipal equalisation system
The purpose of the municipal equalisation system is to ensure that all municipalities have equal capabilities to provide services to their residents – regardless of tax base (inhabitants’ taxable income), population composition and geography.
The income equalisation is the largest part of the municipal equalisation system. The aim is to even out tax base differences so that all municipalities are guaranteed approximately equal tax revenues per inhabitant.
Together with the cost equalisation and structural grants, this should ensure that differences in municipal tax rates only reflect political ambitions and production efficiencies.
Press contact: Olle Castelius, phone: +46 8-5171 40 04.
Presskontakt: Olle Castelius , telefon: 08-5171 42 06.
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