coordinating central and local governments policy in iceland · share of sub-central government...
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Coordinating Central and Local Governments Policy in Iceland
Björn Rúnar Guðmundsson
Head of Economic Department
Ministry of Economic Affairs
A bird´s eye view: Municipalities in Iceland
Overall number of municipalities in Iceland is 77 with an average number of inhabitants just over 4.100.
In reality it makes more sence to look at the larger capital-area on one hand and the rural areas on the other hand.
Strong centralication trend.
About 75 per cent of the population lives in the 15 municipalities in the larger capital-area.
Population development in Iceland, 1990 - 2008
0
50.000
100.000
150.000
200.000
250.000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Larger capital-area The rural areas
Average rate of growth 1.9%
Average rate of growth -0.2%
Source: Statistics Iceland
Autonomy of local governments is very high in Iceland.
• By international comparison icelandic municipalities enjoy a high degree of freedom in the public financial area.
• Number of municipalities has decreased rapidly, but is still very high.
• There is a politicial consensus in Iceland that the role of municipalities in providing public services should be increased.
• Article 61 of the Local Government Act requires that municipalities revenues match expenditure “as far as possible”. This loose phrasing can invite difference in interpretation.
• The three-year plan stipulated by the Local Government Act is not perceived as binding restrictions in all municipalities.
Main expenditure categories of local governments in 2008.
7,9%
2,1%
2,5%
4,0%
4,2%
7,6%
11,0%
12,4%
48,5%
0% 10% 20% 30% 40% 50% 60%
Other
Construction and planning
Environment
Traffic and transportation
Culture
Mutual cost
Social Service
Youth and sports
Education and child care
Source: The Association of Local Authorities in Iceland
Total public investment, % of GDP
Source: Statistics Iceland
0,0%
0,5%
1,0%
1,5%
2,0%
2,5%
3,0%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Local governments Central government
0,0%
2,0%
4,0%
6,0%
8,0%
10,0%
12,0%
14,0%
16,0%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Local governments Central government
Current division of public spending between levels of government.
Public consumption, % of GDP
Poor overall performance in the last three decades
Since 1980 local government sector has only had positive income balance 8 times (central government 12 times).
Both local and central government show a clear pro-cyclical behaviour.
In 2008 the income balance of the central government is shown and calculated without large takeover of lost claims from the Central Bank.
Including these items central government deficit amounts to 13.6 per cent of GDP.
-6
-4
-2
0
2
4
6
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
Income balance of central gov., % of GDP
Income balance of the local gov., % of GDP
Central government average -0.46%
Source: Statistics Iceland
Local governments average -0.33%
Correlation between the output gap and the income balance of central and local governments (% of GDP)
Source: Statistic Iceland and the Ministry of Finance
y = 0,8732x - 0,6324R² = 0,6865
-4
-3
-2
-1
0
1
2
3
4
5
6
-4,0 -2,0 0,0 2,0 4,0 6,0
y = 0,0961x - 0,5534R² = 0,1843
-2
-1,5
-1
-0,5
0
0,5
1
-4,0 -2,0 0,0 2,0 4,0 6,0
Output gap (x-axis),
Income balance of local governments (y-axis)
Output gap (x-axis), Income balance of the central government (y-axis)
Evolution of local governments revenues and expenditures,% of GDP
2000 2001 2002 2003 2004 2005 2006 2007 2008
Total income 11.5 11.8 11.8 12.1 12.1 12.7 13.8 14.2 13.1
11 Taxes 8.7 8.8 8.7 8.9 8.9 9.3 10.1 10.2 9.5
13 Grants 1.0 1.1 1.1 1.2 1.1 1.1 1.2 1.3 1.3
14 Other revenue 1.9 1.8 2.0 2.0 2.1 2.4 2.5 2.7 2.3
Total expenditure 12.0 12.4 13.1 12.9 12.9 12.6 13.5 13.6 14.0
2 Current expense 10.5 10.5 11.5 11.9 11.3 11.3 11.4 11.6 12.1
31 Nonfin. assets 1.4 1.9 1.6 1.0 1.6 1.3 2.1 2.0 1.9
Income balance -0.4 -0.6 -1.3 -0.8 -0.8 0.1 0.3 0.6 -0.9
Source: Statistics Iceland
Main income and expenditure components of local governments operations 2008.
Income Expenditure
54,8%
13,3%
4,6%
9,7%
17,6%
111 Taxes on income and profit
113 Taxes on Property
114 Taxes on goods and services
13 Grants
14 Other revenue
Source: Statistics Iceland
40,3%
28,3%
3,6%
4,0%
1,9%
3,4%
4,7%13,5%
21 Compensation of employees
22 Use of goods and services
23 Consumption of fixed capital
24 Interest
25 Subsidies
27 Social benefits
28 Other expense
31 Nonfinancial assets (Investment)
Share of sub-central government expenditure in total government expenditure
0%
10%
20%
30%
40%
50%
60%
70%
80%
Can
ada
Den
mark
Un
ited States
Ko
rea
Spain
Germ
any
Swed
en
Belgiu
m
Finlan
d
Czech
Rep
ub
lic
Ireland
Au
stria
Neth
erland
s
No
rway
OEC
D average
Po
land
Italy
Iceland
Un
ited K
ingd
om
Hu
ngary
France
Slovak R
epu
blic
Luxem
bo
urg
Po
rtugal
New
Zealand
Greece
State or regional level Local level OECD average
Iceland
Source: OECD National Accounts. All functions, average 1995 – 2005, except; Korea (2000 – 2005), Hungary (2001 – 2005) Poland (2002 – 2005), New Zealand (2003 – 2005) and Slovak Republic (2003 – 2004). For the US, National Accounts do not provide a breakdown between state and local governments.
Economic consequences of local government autonomy
One obvious consequence of small municipalities is administrative inefficiencies.
Administrative cost in the smallest municipalities are up to 150.000 ISK per inhabitant in 2008 but down to 25.000 in the largest municipalities like Reykjavík and Kópavogur.
0
20.000
40.000
60.000
80.000
100.000
120.000
140.000
160.000
180.000
0 5.000 10.000 15.000 20.000 25.000 30.000 35.000
Per-Capita administrative cost and size of municipalities
Source: The Association of Local Authorities in Iceland. Reykjavík is not included.
Economic consequences of local government autonomy
Icelandic local authorities borrowed considerably in foreign currency giving them a significant exposure to fx risk which has had negative balance sheet effects for many municipalities.
The share of foreign debt ratio in 2008 was 42 per cent in long term debt which amounts to 111.6 bn. ISK, 7.6% of GDP...
...but 28 per cent in 1998.
Off-balance sheet debts amount to 52 bn. ISK in 2008. About 80 per cent of this debt is held by the municipalities in the larger capital-area.
Another issue relates to competition among local authorities which under certain circumstances can lead to ineffective distribution of resources. Recent housing boom is a case in point. 0
20.000
40.000
60.000
80.000
100.000
120.000
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Debt in millions of ISK Debt in foreign currency
Source: Statistics Iceland
Currency composition of local gov. long term debt in 2008
Local government budget framework has to be strengthened
Local governments are currently required to „led revenues match expenditure as far as possible“. This should not be seen as a „soft budget“ regime. At the same time it can hardly be seen as a „hard budget“ condition. It is somewhere in between.
During 2002-2008 period 30 municipalities have negative overall balance...
...up to 16 per cent of income.
One municipality had a negative result each year during the seven year period.
During the last few years off-balance sheet items have increased dramatically.
Current regulatory framework needs to be strengthened.
0
2
4
6
8
10
12
14
16
Years 7 6 5 4 3 2 1 0
Source: The Association of Local Authorities in Iceland.
Number of years with negative balance
Nu
mb
er o
f m
un
icip
alit
ies
Coordination between central and local government needs to be increased.
• From an economic policy point of view the central government has to have a lever on overall public sector fiscal position.
• This is particularly important in a crisis situation. In general, however, effective fiscal policy is crucial, particularly should Iceland join the EU.
• Accountability in relation with transfer of services from central to local governments has to be strengthened. As new tasks are assigned to local governments, funding has to be secured.
Re-inventing the wheel is unnecessary –Adopting international best-practice.
• A framework for policy coordination has already been put in place and there is a genuine understanding at both local and central government level for the need to increase policy coordination among different levels of government.
• Studies are under way looking into which setup will be most useful for Iceland.
• A mixture of legal reforms, budgeting rules and increased enforcement mechanism is needed in order to enhance policy co-ordination between different levels of government.
• The time to implement significant reforms in this area has probably never been better than right now.