Norwegian local public finance in the 1930s and beyond

The evolution of the welfare state in the twentieth century has changed local public finance considerably. This article investigates determinants of local public spending in Norway since the 1930s with an emphasis on the fiscal year 1934-35. We document huge variation in local government spending in 1934-35. The disparities initiated several reforms in the 1930s with the aim of reducing the inequality. The changes in regional policy over time are illustrated by correlation coefficients between municipal spending and private income. The correlation is strongly positive in 1934-35, but is reduced over time, and has been negative since the 1970s. We find that the variation in spending between local governments is reduced over time mainly for two reasons. First, while the elasticity of municipal spending with respect to private income is fairly constant over time, the variation in private income has become smaller. Second, grants from the central government have become a larger part of the local governments' budgets and are to an increasing degree used for redistributional purposes.