Contents

1. Introduction
2. The purpose of the general grant scheme
3. Main principles
4. The grant per capita/the equalisation of expenditure/the equalisation of income
5. The grant to the Northern Norway
6. The grant for the remote regions
7. The discretionary grant
8. The grant for the capital
9. The experiment with converting earmarked grants into a general grant
10. The transitional arrangement
    

Appendix:

Calculation matrix for the general purpose grant in 2000

1 Introduction

The General Purpose Grant Scheme is a scheme for providing government grants to the counties and municipalities. It was introduced in 1986. It replaced a system of about 50 specific grants for various purposes in the annual fiscal budget. It has later been revised. The main revision came in 1997, as a following up of the Commitee for the General Purpose Grant Scheme, led by professor Jørn Rattsø. The committee put forward its report officially called: "A simpler and more fair general purpose grant scheme for the counties and the municipalities."

The general purpose grant scheme was introduced as a consequence of the results provided by a series of scientific reports going back to the 1970s. The Central Commitee for Local Government Reform gave its report in favour of such a system in 1979 for the counties and in 1982 for the municipalities. The government responded in a Report to the Storting no 26(1983-84) and presented its final proposal in the Parliamentary bill no 48 (1984-85). The introduction of a general purpose grant scheme must be seen as an important element in the post-war effort to promote decentralisation, democratisation and rationalisation in the public administration.

In 1997 the second part of the report from the Commitee for the General Purpose Grant Scheme was published. The municipalities that were worse off after the reform were compensated through a discretionary grant and a grant for remote regions.

Based on this report the government suggested changes concerning the principles for the taxation of companies. Until 1998 tax revenues went to central government as well as municipalities and counties. These differ a lot between different municipalities and between different counties. These tax revenues also flucuate a lot from year to year. The basic proposal from the commitee was that the corporate tax in its whole should go to the central state. This reform was then proposed by the Government and was accepted by the Storting to be put into effect from 1999. To compensate the municipalities for their loss caused by the reform, the rate of taxation on individuals was raised. In spite of this, some municipalities among them Oslo, had a loss in income tax as a result of this reform. Oslo was partly compensated through the introduction of the Capital Grant. Other municipalities were compensated through the discretionary grant.

General purpose grants are to be provided in the form of block grants that are not earmarked for special purposes. General purpose grants and revenue from local taxes altogether constitutes about 70 per cent of the total income of the local governments. There are no restraints upon the municipalities and the counties concerning their use of the revenue from the general grant system and the local taxes. The only restrictions are the ones given by law. The block grant is a calculated fixed sum that is allocated to each municipality and each county according to certain prinsiples. This fixed sum is not influenced by the local disposition of the grant through the budget year.

2 The purpose of the general grant scheme

• Giving room for greater freedom of local dispositions of income, and, consequently, strengthening the local democracy.
• Making a more fair distribution of income among the counties and among the municipalities.
• Simplifying the regulations by law and the administrative routines.
• Making it easier for the local government to make production of local services more efficient. The lesser the centrally given bonds the easier to promote a more rational use of local resourses.

3 Main principles

The design of the general purpose grant scheme is based on the following main prinsiples:

• The system aims to cover as much as possible of
  the requirements for governmental grants for the provision of ordinary services in counties and municipalities.
• Grants intended for investment, research and development, special projects in some municipalities and the execution of national responsibilities are not to be included.
• Grants are to be provided in the form of block grants that are not earmarked for special purposes. A block grant is a calculated fixed sum that is allocated to each county and municipality.
• The grants are to be distributed according to criteria which can not be directly influenced by the dispositions of the local government.
• The grant is distributed to the counties through a fixed lump-sum ten times a year.
• The equalisation of income and expenditure is a basic consept in the scheme.
• The equalisation of income is based on the prinsiple of equalisation of difference in levels of tax revenues per capita.
• The equalisastion of difference in expenditure arises from the prinsiple of providing an equal standard of public services all over the country.
• The scheme also includes a special grant to the counties and municipalities in the North of Norway . It also includes a special grant to the small provincial municipalities in the remote regions that have a relatively low tax revenues.
• From 1999 the scheme includes a special grant to the capital. This was introduced as compensastion of the tax reform concerning the company taxes.
• Some parts of the scheme are introduced during a transitional period up to 2001.
• The block grant for 1999 consists of 6 different parts of the grant that are allocated through the State Budget. 6 go to the municipalities and 5 go to the counties:

The grants scheme in 1999 accounts for about 50 billion NOK. 32.5 billion NOK to the municipalities and 17.5 billion NOK to the counties.

4 The grant per capita/the equalisation of expenditure/the equalisation of income

The equalisation of expenditure is meant to compensate for the different levels of costs connected to giving the same standard of services to the public in different muncipalities and in different counties.

The differences of the levels of costs have two basic causes:

• Difference in demand for different services.
  A municipality with many old inhabitants, has to supply more services for the elderly than a municipality with many young and middle-aged people. A municipality with many children at the age between 6-15, will have relatively high costs connected to supplying a sufficient offer of good schools.
• Geographical differences that materializes into high costs. A sparsely inhabited municipality will have to build more schools with fewer pupils than a densily populated municipality.

The grant per capita is primarily distributed by a similar amount to all inhabitant throughout the country. The equalisation of expenditure is carried out by a calculation of the objective needs for expenditure for each municipality. These calculations are based on the principle of a zero-sum-allocation. The municipalities and counties that have cheaper costs of production allocates parts of their share of the grant to the counties and municipalities with more expensive costs of production. The allocation is based on special criterias, 17 criterias for the municipalities and 16 for the counties (cf. the Appendix).

The general grant is also used to equalize income. All municipalities and counties with per capita tax revenues below 108 per cent of the average, receive grants to bring them up to approximately this level. That is the grants cover 92 per cent of the difference between this sum and the municipalities’ own average of tax income. All municipalities with per capita tax revenues above 140 per cent of the average, are drawn half of the revenues above this level. The municipalities with an average income between these levels, receive no compensation.

The purpose of the equalisation of income is to level out the great differences in income tax between the municipalities and between the counties. It is a political prinsiple that the supply of services to the elderly or good schools for the young are not to be reliable on the level of the local taxes.

The General Purpose Grant Scheme is going to be distributed on a running basis from the year 2000. This means that the taxes collected from the municipalities and the counties are equalised the same year they are received as income (the equalisation of income was previously based on tax figures dated two years back).

5 The grant to the Northern Norway

The municipalities and counties in Northern Norway receives an extra grant. The reason is the special expencese connected to the northern areas. It is politically accepted that this area is to have a specially high level of public services. The grant is given in form of a lump-sum given to the municipalities and counties in the three most northern counties based on the number of inhabitants.

6 The grant for the remote regions

This grant is distributed to the small and remote municipalities with a number of inhabitant below 3000 persons. The level of the per capita tax has to be below 110 per cent of the average. The municipality in question also has to be situated in an area that is intitled to specific measures as a remote district.This grant is a fixed lump-sum, which is distributed according to the geographical location of the municipalities and counties.

7 The discretionary grant

This grant is divided into two parts. One is the ordinary discretionary grant. It is given to municipalities and counties that have transitionary economic problems. It is also given as a compensastion for special local economic difficulties that are not covered by other parts of the general grant system. The second part is the special discretionary grant. This grant (together with the grant for remote regions) compensates the municipalities and counties that had an economic loss as a result of the reform in 1997.

8 The grant for the capital

This grant was introduced in 1999 as compensation for the loss of corporate tax for Oslo, and for the expenses connected to Oslo's role as the capital of Norway.

9 The experiment with converting earmarked grants into a general grant

Starting with the year 2000, the Norwegian central government is going to conduct for a period of four years an experiment with converting earmarked grants into a general grant for 20 specially selected municipalities. The main purpose with this experiment is to investigate whether the conversion of earmarked grants increases the local room for manoeuvre and results in a more effective local allocation of resources.

10 The transitional arrangement

When the municipalities and counties are given new responsibilities or earmarked grant are included in the general purpose grant scheme, there is a transitional period. When these grants are included, that leads to a different allocation in comparison to the initial allocation. The transitional period lasts for five years. This gives the municipalities and counties the opportunity to adjust to the changes in grants resulting from the scheme.

At last it is important to remember that the grant scheme is a system of distribution. It says nothing about how large the total grants should be. This a determined by the Storting in the annual fiscal budget.

Appendix:

Calculation matrix for the general purpose grant in 2000

Tabel 1 Calculation matrix for the municipalities

Tabel 2 Calculation matrix for the counties