The economic behavior of local governments 1972-2009

The purpose of this report is to analyse the spending behaviour of local governments in Norway. To this end, we apply a simultaneous model of the allocation of spending to different service sectors; such as administration, education, childcare, health care, social assistance, child protection, care for the elderly and disabled, culture and infrastructure. The simultaneous approach allows us to take into account the municipal budget constraint, which implies restrictions on parameters across service sectors.

This report extends on previous work by comparing estimation results for 38 different cross-sections based on the years 1972 – 2009. It is demonstrated that the estimated model parameters in most of the years have the expected sign as predicted by theoretical considerations. After the coefficients have been adjusted for price and real income growth, it is found that the estimates are fairly stable over time, although less stability is observed in the earlier years of the analysis. Thus, the results provide comprehensive information about the structure of spending variations both within the cross-section and over time. The report includes a discussion of how changes in central government regulations of local government activities have affected the municipal spending behaviour. Moreover, the estimation results provide information about expenditure needs that could be compensated through the equalization system for local governments.