The big picture of the development of the Finnish municipal economy is the same whether it is examined at the national level, by size class or by region. Both revenue and expenditure have risen sharply between 2002 and 2018. A significant share of municipalities has not been able to finance their investments with their income and cash flow has remained negative. This raises the need to evaluate the effectiveness of the method of assessing the principle of financing to ensure municipal autonomy in the future.
Oxford Research was part of the research group led by Tempo Lecon Oy that evaluated the methods of assesing so-called “financing principle” applied in Finland. The project was done as a part of the Finnish Government’s analysis, assessment and research activities. Oxford Research provided comparative research from other Nordic countries about the financing the municipalities.
In the report, we propose that the following definitions are adopted regarding the financing principle together with the following clarifications to the current evaluation model. The financing principle is conceptually divided into: (a) the cost of current tasks and (b) the cost of any new or deleted tasks that may be envisaged in the future. For the current tasks, we propose that the assessment of the implementation of the financing principle be based on the development of the share of municipal and state contribution to the revenues of the communal sector, the annual margin of the communal sector municipality and, as a supplementary consideration, the tax pressure resulting from cost changes calculated by the Ministry of Finance.
The current tasks are based on a fairly well-established division between the state and the municipalities in financing municipal expenditure. For new statutory tasks or changes in responsibilities, the starting point is 100% government funding (or change in funding). Significant changes in statutory tasks should be subjected to an ex-ante evaluation, which will calculate the cost of the task being set and describe the mechanism by which the state compensates the municipalities. We also propose that the valuation model be applied at the level of the entire municipal field, and by size class and province, but not at the individual municipal level. Assessed in this way, the financing principle seems to have been fulfilled at least partially between 2002 and 2018, with the provison that the study has not been able to link the investment expenditure to the tasks assigned to the municipalities by law.
The report is available in Finnish with English abstract from the Government’s analysis, assessment and research activities webpage or by clicking the image below.