Reforming Fiscal Federalism and Local Government

Beyond the Zero-Sum Game

image of Reforming Fiscal Federalism and Local Government

This book describes and examines reforms of fiscal federalism and local government in 10 OECD countries implemented over the past decade. The country chapters identify common patterns and factors that are conducive to reforms of the intergovernmental fiscal framework, using a common methodological approach. The summary chapter highlights the cross-cutting issues emerging from the country chapters and shows the key factors in the institutional, political, economic and fiscal areas that are supporting reform success. The report’s approach results in valuable insights for policy makers designing, adopting and implementing fiscal federalism and local government reforms.



Finland: Restructuring local government and services

In 2007, Finland started implementing the act on restructuring local government and services (also known under its acronym PARAS reform), which aims at creating economies of scale by encouraging voluntary municipal mergers and municipal co-operation areas for public service delivery. Given the high degree of municipal autonomy in Finland and the country’s tradition of consensual decision-making, it was not possible to use threats or sanctions to force municipalities into implementing the reform (as was the case in Denmark, where municipalities were given one year to merge voluntarily, and if they did not comply, the central government could impose the merger). Municipalities could therefore choose between merging and joining larger co-operation areas, but financial incentives were used to encourage municipalities to merge. Municipal mergers were already on the agenda before this reform, and in 2002, a substantial increase in merger subsidies was granted to municipalities wishing to merge. This led to a reduction of the number of municipalities from 452 in 2001, to 432 in 2005. The PARAS reform () further reduced the number of municipalities to 348 in 2009, and municipalities have until 2013 to benefit from financial incentives under the current framework.


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