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The financial crisis is causing major issues in the economies of municipalities when tax revenues decrease drastically. The acute shortage of financing can be remedied with state subsidies, but long-term issues must be addressed by using more powerful means than before.
The municipality and service structure reform project (PARAS), which is useful as such, is no longer enough: instead, the municipality structure reform must be boosted by taking an entirely new approach. In this situation, a municipality structure reform model managed from above should be seriously considered; in the model, issues would be solved long into the future in the same connection.
The small-municipality-intensive structure is a key issue
Internationally, the Finnish municipality sector has an exceptionally significant role because municipalities provide the majority of the most important public services. This means that in Finland, there has been strong confidence in the advantages of service production decentralisation. In fact, the strategy based on decentralisation has functioned well, since basic services are produced efficiently in Finland.
The starting point of service production has not been easy, as Finland is a small-municipality-intensive country, which is a difficult issue for arranging service production. However, small municipalities in Finland have handled demanding tasks by being members of municipal federations, or by purchasing services from other municipalities and the private sector. However, the situation of small municipalities is becoming more difficult because the ageing population is increasing service demand, while migration takes residents with the highest tax-paying ability to growth centres.
Municipal consolidations have been offered as the ideal solution for municipality problems. This has been based on the idea that a larger municipality would be more efficient. This idea is justified by the fact that according to study results, municipalities larger than average perform well in efficiency comparisons. However, studies concerning the impact of municipal consolidations show that the consolidations have not resulted in significant cost savings or tax revenue growth.
The evident conclusion of the study results is that with the existing approach, carrying out municipal consolidations is such a burden that it is very difficult to obtain efficiency benefits from them.
The PARAS project is not enough
The PARAS project has functioned well in so far as it has inspired municipalities to more carefully consider the advantages and disadvantages of municipal consolidations and cooperation. Municipalities have also been persuaded into municipal consolidations with hard cash: solely in 2009, the government will pay approximately EUR 140 million in municipal consolidation subsidies. The government’s total bill for municipal consolidations already agreed is in the hundreds of millions of euros. Despite these contributions, the reform of the municipality and service structure is progressing too slowly.
In addition, the financial situation has totally changed the situation. Earlier on, it was thought that there is enough time to set structural reforms well in motion before the population ages and before the national economy permanently enters a stage of slow growth. Now, the situation is the worst possible, as the municipal economy will sink deeper in the next few years, and the long-term difficulties, which are already known, will begin after that. It is sad but true that the municipality structure’s window of opportunity has been used for considering and preparing different service models.
This is why a major municipality reform, managed from above, should be regarded seriously in this situation. After a thorough reform, municipalities would be able to focus on their actual basic task, which is producing and arranging services. Municipality management certainly is challenging enough without exhausting municipal consolidation speculations.
In Finland, the common approach has been to do things through municipalities. This is why it would, also from now on, be the most natural approach to arrange services in municipalities, which would be larger and stronger than at present. It is not sensible to establish new administrative models or administrative levels because creating them from scratch would consume too much time.
Antti Moisio
Principal Economist, VATT