Author : Ramanath Jha

Expert Speak Urban Futures
Published on Aug 24, 2021
Nordic countries and urban local governance architecture The five Nordic countries, located in northern Europe—Denmark, Finland, Iceland, Norway, and Sweden—have some of the strongest local governments in the world. They also consistently figure amongst the 10 best democracies in global surveys. An earlier article by this author analysed some of the factors that put these countries at the top of the democratic chart and underlined that countries with small populations, large geographies, and great wealth allowed them to practice democracy at leisure. The surveys carried out did not consider the ‘difficulty factor’ of certain other nations not blessed with similar fortune. This article, however, wishes to draw attention to the quality of decentralised governance that the Nordic countries have put in place. It has been universally acknowledged that the quality of decision-making is enhanced when taken at the location closest to where the decision’s impact would be felt. Despite their small populations, where such large-scale decentralisation has much less pressing applicability than in many other heavily populated countries, these countries have followed this governance logic to the T. The fact, however, is that much larger countries, including India, continue to operate in highly centralised governance models. As a consequence, the quality of decision-making is severely impaired. This is best illustrated in the differences in the quality of urban local governance rendered to Nordic citizens and those in Indian cities.
It has been universally acknowledged that the quality of decision-making is enhanced when taken at the location closest to where the decision’s impact would be felt.
The table below summarises the key fundamentals of the five Nordic countries. Here, we have Iceland with one of the smallest populations amongst nations, less than half a million and Sweden with the largest population amongst Nordic countries, about 9.75 million. The table also shows that the average population of Nordic municipalities is small and would have been smaller if their largest cities were not included (Copenhagen 0.59 million, Helsinki 0.63 million, Oslo 0.66 million, Stockholm 0.91 million, and Reykjavik 0.12 million).
  DENMARK FINLAND ICELAND NORWAY SWEDEN
POPULATION (Millions) 5.66 5.47 0.357 5.17 9.75
AREA (Square Kilometres) 42,924 303,892 103,000 304,226 407,340
GDP PER CAPITA (USD) 40,380 35,754 59,260 57,702 39,776
TOTAL MUNICIPALITIES 98 313 79 428 290
AVERAGE POPULATION OF MUNICIPALITIES 58,154 17,528 4,247 12,182 33,612
Source: Local Government in the Nordic and Baltic Countries, SKL International, 2016; Local government in Iceland, ALAI, 2008 The Urban Local Bodies (ULB) in the five Nordic countries, with some differences, perform a similar set of functions. At the top of the chart is social services. These comprise primary education; primary healthcare; childcare; care for the elderly and differently-abled; welfare homes; and social assistance benefits. Some of them also shoulder a more considerable functional burden in the areas of education and health. In education, the basket includes pre-school and secondary education, vocational training, adult education, and libraries. In health, Finland looks after secondary healthcare and dental services. Some other functions that ULBs across the world typically perform are also amongst the tasks of Nordic ULBs. These include waste management, town planning, environmental protection, public parks and gardens, building and maintaining technical infrastructure such as roads, water and sewerage, and public transport. Some also take upon themselves energy provision, culture, economic promotion, trade, industry, and tourism.
In education, the basket includes pre-school and secondary education, vocational training, adult education, and libraries. In health, Finland looks after secondary healthcare and dental services.
Apart from the decentralised governance architecture, the massive devolution of finances to municipal bodies provides the greatest strength to quality municipal functioning. Manifestly, none of these countries accept the common Indian practice to pile up functions on to ULBs without bothering to provide money for them. The scale of the devolution sets these ULBs apart. The following table provides a picture of the scale of such expenditure and sources of municipal finance.
  DENMARK FINLAND ICELAND NORWAY SWEDEN
LOCAL GOVT EXPENDITURE AS PERCENT OF GDP 36.5 23.9 32 15.4 25.4
LOCAL SPENDING AS PERCENTAGE OF TOTAL PUBLIC EXPENDITURE 64.1 41 35 33.8 49
LARGEST LOCAL TAX Income Tax Income Tax Income Tax Income Tax Income Tax
EQUALISATION ü ü ü ü ü
GRANTS ü ü ü ü ü
Source: Local Government in the Nordic and Baltic Countries, SKL International, 2016; Local government in Iceland, ALAI, 2008 In Denmark, local government expenditure, at 36.5 percent of GDP or 64.1 percent of total public spending, is the highest in the European Union (EU). The more significant part of municipal revenues comes from taxation, particularly local income tax—an average of 24.9 percent of inhabitants’ taxable income. Municipalities are free to determine local taxes in principle, although there are limits in practice. A system of grants combines a block grant and partial reimbursements for specified functions, including social assistance transfers. One of these grants, called ‘Equalisation’, is based on the difference between their spending needs and tax receipts at the average tax rate.
A system of grants combines a block grant and partial reimbursements for specified functions, including social assistance transfers.
Finnish municipalities enjoy high levels of autonomy in both fiscal and legal terms. In Finland, local government expenditure is high at 23.9 percent of GDP or 41 percent of total public spending. According to figures from Statistics Finland, just over half of municipal revenue in 2014 came from taxes, most of this (86 percent) from income tax. Finland, along with Sweden, allows municipalities to set their own basic income tax rate for their inhabitants. In Norway, local government expenditure stands at 15.4 percent of GDP, or 33.8 percent of total public spending. According to Ministry of Finance figures, in 2015, municipal revenues comprised tax receipts totalling at 40 percent, general government grants standing at 35 percent, earmarked transfers at 5 percent, and compensation for VAT paid at 5 percent. User fees and charges made up 14 percent. Income tax is the main source of tax revenue. Municipalities also receive a share of wealth tax at a flat rate of 0.7 percent. Besides, they may levy local taxes on property and natural resources. In Sweden, local self-government is enshrined in the Instrument of Government. This stipulates that local authorities are responsible for local public matters, and ULBs may levy a tax to manage their affairs. In Sweden, local government expenditure is the second-highest in the EU, at 25.4 percent of GDP or 49 percent of total public expenditure. Over two-thirds of revenues come from taxes, in particular the personal income tax. The state runs a financial equalisation system to compensate for disparities between local authorities in both tax revenues and the cost of providing services. This is funded mainly by the central government but partly by contributions from municipalities and counties whose fiscal capacity is more than 115 percent of the national average.
The state runs a financial equalisation system to compensate for disparities between local authorities in both tax revenues and the cost of providing services.
In Iceland, the most substantive function of ULBs is education, comprising half of all of their expenditures. Next are social services taking up 13 percent of spending. The local authorities’ share in public consumption in Iceland has ranged between 32 and 35 percent in recent years. Municipal income tax forms 63 percent of ULB income. They are further backed by an ‘Equalisation Fund’ and property taxes. What stands out from the above discussion is that the Nordic countries have put enormous faith in ULBs regarding the delivery of the essential services that enable the daily life of citizens. Additionally, they enjoy a high degree of empowerment and self-governance. Above all, they completely reject the idea of an unfunded mandate and go to great lengths to finance ULBs through central transfers, allowing them to spend an average of 26.64 percent of the national GDP. That is the prime reason why citizens are well served in Nordic ULBs. This stands in stark contrast with India, where total municipal expenditure accounts for about 0.79 percent of the country’s GDP.
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Author

Ramanath Jha

Ramanath Jha

Dr. Ramanath Jha is Distinguished Fellow at Observer Research Foundation, Mumbai. He works on urbanisation — urban sustainability, urban governance and urban planning. Dr. Jha belongs ...

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