The financing of the local government sector

Due to its extensive responsibilities, the local government sector manages a significant part of the country's financial resources, and it accounts for a signficant part of the country's economic activity. The sector's total revenue amounts to about 19 per cent of GDP for mainland Norway. One in five Norwegian employees are employed in the local government sector. Hence, because of its size, developments in the sector are of great importance in the Norwegian economy, and the total use of resources in the sector has a major impact on the economy as a whole.

Sources of income

The local government sector is financed through tax revenues, grants (subsidies) from the state and user payments and fees from residents. The majority of the revenue comes from tax revenues and the general grant from the state. These are "free" revenues, which the municipalities can dispose of freely within legal requirements for which services the municipalities are to provide. The free revenues make up just over 70 per cent of the local government sector's total revenues.

There is broad political agreement that the local government sector should mainly be financed through free revenues. Free revenues allow municipalities to make priorities and offer services in line with local needs.

The main part of the local government sector's tax revenues is a share of tax on ordinary income and wealth for individual taxpayers. In addition, municipalities have the opportunity to impose property taxes, while some municipalities have income from natural resource taxes from hydropower plants.

In addition to free revenues, municipalities also receive earmarked grants. These are grants that the municipalities must use for purposes specified in the state budget. Municipalities also receive user payments and fees for municipal services. These are residents' payments for e.g., nursery schools kindergartens, nursing and care services and technical services (planning and construction cases, water, sewerage and waste disposal).

State-municipality interaction

Since the local government sector constitutes a large share of the public sector, there needs to be a good correspondence between the development of the municipal economy and the overall economic policy. Such correspondence is ensured through the establishment of revenue framework for the sector. Stortinget adopts the state grants and the proportion of tax revenues which accrue to municipalities and counties when processing the state budget. Municipalities can levy property tax within regulations and the maximum rate set by the state. User payments/fees from residents should, as a general rule, cover the costs of producing services. Legal requirements for financial management ensure, among other things, that there is a financial balance in the operation of municipalities and counties.

With this, the state largely governs the overall framework for the local government sector economy. At the same time, municipalities are required to carry out a comprehensive set of tasks through law. It is therefore important that there is a correspondence between the municipalities' tasks and the revenue framework provided by the state. The local government sector must be guaranteed stable income to finance nationally adopted welfare benefits.

In order to give municipalities predictability when making their budgets, the municipal bill (Kommuneproposisjonen signals in May the year before the budget year how much revenue growth the municipalities can expect in the coming year. The government presents the final proposal for the revenue framework for the local government sector for the coming year in the proposal for the state budget (Prop. 1 S).

What does the local government sector spend its resources on?

The local government sector's use of resources is significantly linked to the responsibility for national welfare services. Nursery schools, primary and lower secondary schools and the health, care and social services sector account for about 75 per cent of the municipalities' gross operating expenses.

About half of the counties' operating expenses goes to upper secondary education, while 1/3 of the expenses goes to transport (roads and local public transport).