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Prof. Maarten Allers: ‘Local government funding unnecessarily complex and inefficient’

23 November 2011

The proliferation in the number of grants that central government pays out to local authorities must be halted. Cutting back on the number of separate grants would result in considerable cost savings and remove many uncertainties. ‘The present government grant system is inefficient,’ says Maarten Allers, professor of the economics of sub-national government at the University of Groningen .

In the Netherlands most of the tax collected goes to central government, while the 418 municipalities are actually responsible for providing a large proportion of the public services, for which large sums of money are required. To be able to fund all these services the municipalities receive some EUR 27 billion a year from the state, channelled through no less than 91 separate grants. ‘Efforts to reduce this number have had some effect, but there is still a myriad of grants,’ says Professor Allers. ‘The issuing of all these grants also involves a great deal of bureaucracy and takes up a large part of the capacity of both the municipalities and central government itself.’ Professor Allers has therefore looked at what the consequences would be of merging all these different budgets to create one new government grant. ‘I have reached the conclusion that merging them into one or just a handful of grants would cut costs and have little impact on the distribution of the funds to the municipalities. It would therefore not create any insurmountable obstacles or an inequitable distribution of the funds.’

More problems, more money

Local authorities now receive more than half their income from central government grants. Only 15 per cent comes from taxes which the municipalities levy themselves, such as council tax and dog licences. ‘These government grants differ greatly from one municipality to another, depending on various criteria,’ says Professor Allers. ‘In general terms, the more problems there are, the more money they get. Rotterdam , for example, receives 92 per cent more per resident than average, while rural Scherpenzeel receives 50 per cent less than average.’

Little policy freedom

‘The largest proportion (66 per cent) of the government funding to local authorities comes from the Municipalities Fund. This is essentially the municipalities’ pocket money. Alongside this, there are another 37 specific grants – which can be seen as like a clothing allowance. The specific grants – there were once more than 500 of them – are earmarked. That means that they may only be spent on designated things. ‘This leaves the municipalities with little policy freedom,’ explains the professor. ‘It also suggests little faith on the part of the grant giver. The municipalities are in a better position than central government to know what expenditure would be worthwhile.’ There has been some improvement in recent years, however, in that municipalities now have more freedom concerning how they spend the earmarked grants.

Blurred

The trend is moving in the opposite direction with regard to the Municipalities Fund though. Where previously almost nothing other than the general grant to be freely spent was paid out from that Fund, the Municipalities Fund now consists of 54 separate budgets. ‘Pocket money and the clothing allowance are therefore getting mixed up’, explains Professor Allers. ‘The distinction between targeted funds and general grants from the Fund has become blurred.’

The cabinet wants to move these grants to the general municipal funding system. Quite rightly, argues the professor, because there are still too many different grants. ‘According to central government, the municipal authorities should be free to spend grants from the Municipalities Fund as they see fit, but this is certainly not always consistently applied. Thus the policy aimed at reducing the number of separate grants is to some extent only cosmetic.’

Smaller government apparatus

‘My research shows that it is entirely unnecessary to maintain all these separate budgets’, states Professor Allers. ‘It is interesting to note that merging all these grants would have little effect on the distribution of the funding among the municipalities. The clothing allowance of the municipalities as a whole is actually just as fragmented as the pocket money. This was not recognized previously because no one had looked at the funding system as a whole.’ Alongside the cost savings, simplifying the funding system by merging all the individual budgets will also make it more logical and transparent, is the professor’s argument. ‘The government would like to see a leaner and meaner government apparatus. Reducing the number and types of grants is consistent with this. They wish to manage at arm’s length: that does not require 91 management decisions.’

Some grants for contingencies, such as the supplementary grant for municipalities in financial difficulties, however, should remain separate. The same may also apply to a small number of other minor grants for experiments or special projects, is Professor Allers’s view.

Reservation

Professor Allers has one reservation in the context of this argument and that is when the municipalities have more spending autonomy, there is an inherent danger of an increased regulatory burden being imposed by the politicians in The Hague . ‘They could be communicating vessels. Even though central government says that it would like the municipalities to have more freedom, a leopard cannot change its spots. If they can no longer maintain control through the money, they will probably try to exercise it through regulatory control.’

Curriculum Vitae

Maarten Allers ( Utrecht , 1964) studied economics in Groningen and was awarded a PhD by the same university in 1994 for his thesis entitled ‘Administrative and compliance costs of taxation and public transfers in the Netherlands ’. After gaining his PhD, he remained as a researcher linked to the Centre for Research on Local Government Economics (COELO). The above opinion is a shorter version of the speech given by Maarten Allers on 22 November on the occasion of his official appointment as professor of economics of sub-national governments.

Last modified:15 September 2017 3.10 p.m.
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