Norwegian local public finance in the 1930s and beyond

Abstract

The evolution of the welfare state in the twentieth century has changed local public finance considerably. This article investigates determinants of local public spending in Norway since the 1930s with an emphasis on the fiscal year 1934-35. We document huge variation in local government spending in 1934-35. The disparities initiated several reforms in the 1930s with the aim of reducing the inequality. The changes in regional policy over time are illustrated by correlation coefficients between municipal spending and private income. The correlation is strongly positive in I934~35> but is reduced over time, and has been negative since the 1970s. We find that the variation in spending between local governments is reduced over time mainly for two reasons. First, while the elasticity of municipal spending with respect to private income is fairly constant over time, the variation in private income has become smaller. Second, grants from the central government have become a larger part of the local governments' budgets and are to an increasing degree used for redistributional purposes. The development of the Western welfare states during the twentieth century has involved a steady growth of public sector spending and changes in public sector institutions. In an international perspective, the Nordic countries have chosen to provide a large share of public services at the local government level.1 Thus, the economic history of the Nordic welfare states is closely related to the evolution of the local public sector. The driving forces 1 For Norway, the local government share of GDP expanded from about 5 per cent in the 1 900s to about 9 per cent in the 1930s and 17 per cent in the 1980s (Borge and Rattso 1999b). In terms of employment, the local governments employed about 8 per cent of the workforce and 55 per cent of public sector employees in the 1960s. In the 1980s, these shares had increased to about 18 and 70 per cent respectively (source: NOS National Accounts). For the Scandinavian countries in 1990, the local government spending share of general public sector spending was 60 per cent in Norway, 68 per cent in Denmark and Finland, and 71 per cent in Sweden (source: United Nations National Accounts Statistics, 1994).