Fiscal easing in local governments facing potential merger: Visible in budgets or hidden in overruns?
| Published date | 01 December 2022 |
| Author | Jostein Askim,Kurt Houlberg,Jan Erling Klausen |
| Date | 01 December 2022 |
| DOI | http://doi.org/10.1111/padm.12781 |
ORIGINAL ARTICLE
Fiscal easing in local governments facing potential
merger: Visible in budgets or hidden in overruns?
Jostein Askim
1
| Kurt Houlberg
2
| Jan Erling Klausen
1
1
Department of Political Science, University
of Oslo, Oslo, Norway
2
VIVE, The Danish Center for Social Science
Research, Copenhagen, Denmark
Correspondence
Jan Erling Klausen, Department of Political
Science, University of Oslo, PB 1097 Blindern,
0317 Oslo, Norway.
Email: j.e.klausen@stv.uio.no
Funding information
Norges Forskningsråd, Grant/Award Number:
255111
Abstract
Mergers incentivize local governments to ease their fiscal
policies before the merger is implemented. This incentive is
powerful: it is known that local governments start easing
fiscal policies even before they know for sure that a merger
will occur and even if merging is what they want. Based on
a study of Norwegian municipalities, this article shows that
irrespective of whether local governments face certain or
potential mergers, their fiscal easing is manifested primarily
in budget overruns rather than candidly documented in
budgets. Among local governments facing a potential
merger, unwilling governments ease their fiscal policies
more than willing ones do and to a larger extent apply a
concealment strategy.
1|INTRODUCTION
The structural reform of local government systems through voluntary or enforced mergers has been a recurring item
on many countries' policy agendas for several decades (Baldersheim & Rose, 2010; Paddison, 2004; Sancton, 2000).
Merging local governments has been propagated as a cost-saving measure, although empirical evidence is mixed
(Blom-Hansen et al., 2016; Swianiewicz & Łukomska, 2019; Tavares & Rodrigues, 2015). A mechanism that counter-
acts cost-saving is easing of local fiscal policies just before a merger is implemented, a behavior closely related to a
phenomenon known as freeriding (Hinnerich, 2009). A merger creates a common-pool problem—“a future common
pool which the amalgamating entities can try to exploit prior to amalgamation”(Hansen, 2019; see also
Ostrom, 1990). The prospect of a merger incentivizes local governments to increase spending on local welfare goods
and accrue localized benefits while they still have the authority to do so. Premerger fiscal easing entails last-minute
Received: 21 December 2020 Revised: 17 August 2021 Accepted: 29 August 2021
DOI: 10.1111/padm.12781
This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which
permits use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no
modifications or adaptations are made.
© 2021 The Authors. Public Administration published by John Wiley & Sons Ltd.
Public Admin. 2022;100:999–1018. wileyonlinelibrary.com/journal/padm 999
changes in economic policy aimed at maximizing benefits for the present citizenry before “shutdown”—a behavior
incentivized by the expectation that the merging local government can maintain benefits for its present citizenry
while sharing costs with others in the merged entity.
Although accounting and auditing regulations limit the extent of fiscal easing and its damaging fiscal effects,
premerger fiscal easing is a real-world problem. At stake are the legitimacy and effectiveness of important public sec-
tor reforms. Seen from the perspective of the new merged entity, premerger fiscal easing reduces the economic
potential for future services and priorities. At the aggregate level, it undermines the legitimacy and effectiveness of
consolidation reforms—that is, nationwide reforms aiming to merge local governments (Reingewertz &
Serritzlew, 2019). Reformers try to suppress fiscal easing by, for example, limiting local governments' spending and
lending autonomy during the reform period. Because the understanding of premerger fiscal easing is incomplete,
however, such countermeasures do not always work.
Although most common-pool-oriented research on local government mergers has focused on situations where
mergers are all but certain, recent research has demonstrated that fiscal easing occurs not only among those certain
of merging with others but also among those who believe merging is a potential outcome of an amalgamation reform
(Askim et al., 2020). This article continues efforts to expand the reach of common-pool research on mergers by ask-
ing whether premerger fiscal easing predominantly occurs in the open, documented in budgets, or more covertly, as
budget overruns. We hypothesize that covertness is the strategy of choice. The second, more explorative research
question is whether the tendency to be open or covert about premerger fiscal easing varies depending on a local
government's willingness to merge.
Our research setting is Local Government Reform in Norway. We apply a difference-in-difference (DiD) logic
and—uniquely in common-pool studies of local government consolidation reforms—compare budgeted and actual
spending before and after the reform started among municipalities grouped by their levels of territorial uncertainty.
2|ANALYTICAL FRAMEWORK
2.1 |Mergers and the common-pool problem
The common-pool problem arises when the cost of an activity that benefits a small group is shared among a larger group
(Hardin, 1968; Ostrom, 1990). The common-pool problem is sometimes formalized as the so-called law of 1/n, whereby
a district receives all benefits from projects in its area but pays only 1/n'th of the costs (Baqir, 2002; Burnett &
Kogan, 2014). Representatives have an incentive to maximize projects in their own jurisdictions and thus deplete the
common pool. The costs of doing so are shared by all, while the benefitsare enjoyed only bythe owner of each project.
Like the scenario captured by the strategic game “the tragedy of the commons”(Hardin, 1968), common-pool
theory predicts that the aggregate outcome of project decisions will be suboptimal from the joint political assembly's
perspective. The immediate “tragedy”is collective excessive spending: implementation of a volume of projects that,
in sum, is incompatible with sound fiscal management and long-term financial capacity. Furthermore, because
benefit-maximizing jurisdictions prioritize projects according to expected utility, fiscal easing would logically lead to
the implementation of projects with steadily decreasing net utility. In other words, if the common pool pays for a
large portion of the bill, each party is incentivized to choose projects that they would otherwise reject. Because fiscal
easing reduces the joint assembly's future room for maneuver, upcoming projects with a higher expected utility will
be rejected because funds are tied down by projects with a lower expected utility. Finally, the joint assembly incurs a
loss of utility if its utility function is different from the aggregate of the involved jurisdictions' utility functions. Pro-
jects with high utility—seen from the collective point of view of the new merged unit—are therefore crowded out by
less useful projects. Losses incurred due to premerger fiscal easing may reduce or balance out net savings from real-
izing economies of scale in the new merged units—not least because savings from mergers may be limited or nonex-
istent (Blom-Hansen et al., 2016).
1000 ASKIM ET AL.
To continue reading
Request your trial