General government grants as a stabilisation policy instrument

The Swedish National Audit Office notes that general government grants issued for stabilisation purposes sharply exceeded the amounts required to sustain municipal activities during the pandemic at pre-crisis levels, despite feeble growth in municipal tax revenues in 2020. In 2021 and 2022, the tax base showed strong growth, and there was thus no need for stabilisation in those years.

While it is difficult to pinpoint the precise effect that increased general government grants had on municipal activities, audit findings show that, in the first pandemic year of 2020, the effect was relatively limited. Municipalities and regions conducted fewer activities funded by taxes and general government grants than were planned in their budgets, even though their financial situation did not require cutbacks. It is the assessment of the Swedish National Audit Office that this is largely explained by the effects of the COVID-19 pandemic as a health crisis. Furthermore, it is not self-evident that municipalities and regions would have raised their tax rate during the pandemic without the increases in general government grants. The audit shows that decisions on tax rates are often governed by more strategic and long-term considerations.

The Swedish National Audit Office notes that the Government’s documentation lacked transparency. None of the published material or other documentation accessed by the Swedish National Audit Office clarify the effects that the increased general government grants – that were proposed and decided in June through an additional amending budget – were expected to have.

The Government is also ambiguous on the factors that guided the sizing of the temporarily raised general government grants. From the documents accessed by the Swedish National Audit Office, it is clear that the Government Offices’ initial assessment of the size of the contribution needed by the local government sector to keep employment at the pre-pandemic level was significantly below the amount proposed by the Government in the spring amending budget for 2020. This suggests that the Government also took account of factors other than those resulting from the recession in its sizing of temporarily raised general government grants.

The Government does not distinguish between municipalities and regions in its reporting. Given that the pandemic affected the two sectors differently – and that they thus also had varying prospects for implementing the increased general government grants in their operations – the Swedish National Audit Office assesses that the Government should have reported developments for municipalities separately from those of regions.

The Swedish National Audit Office considers that any excessive government grants need to be weighed against the lack of efficiency stemming from such oversizing. There is a risk that excessive contributions that lack a clear link to the assumed losses of tax revenue will undermine municipalities’ and regions’ budgetary discipline in the long term. This may cause them to defer necessary efficiency enhancement work, or increase their expenditure in a way that is not sustainable in the long term. Over time, any increase in expenditure will also need to be financed by raised municipal tax rates, given that the central government does not contribute additional funds. Another risk of oversizing is that resources for which the central government has scope to allocate to economic stabilisation measures fail to end up where they bring the most benefit.