Academic journal article Public Finance and Management

Why Do Per-Household Expenditures Differ between Municipalities? 1

Academic journal article Public Finance and Management

Why Do Per-Household Expenditures Differ between Municipalities? 1

Article excerpt

1.INTRODUCTION

In recent years, the attention paid to municipal governments has increased due to their inability to finance municipal services. Municipalities argue that there is an ever increasing fiscal imbalance between their revenues and their expenditures and therefore they require more funding from the higher levels of government.2 They also argue that they deserve more funding because they are the engines of economic growth for an economy. Recent empirical evidence by Partridge, Olfert and Alasia (2007) validates the engines of growth hypothesis for the Canadian economy.

Although the fiscal imbalance between revenues and costs has received a lot of attention, the attention for the most part has focused on the revenue side.3 More recently, however, the cost structure of providing services has received an increasing amount of attention. In this paper, we examine the importance of factors such as governance, population growth, assessment, housing density and municipal size that may account for different levels of per-household expenditures between municipalities. We also examine factors that affect the provision of individual services, such as general government and parks and recreation.

The determinants of municipal expenditures have important policy implications, in terms of municipal governance and municipal amalgamations. Municipal governance is a controversial issue in the Province of Ontario. Ontario municipalities are either "one-tier" whereby they are responsible for the provision of all municipal services, or "two-tier" whereby they belong to a regional or county form of government in which case both levels of government share in the provision of municipal services. An ongoing policy issue is whether to expand the two-tier level of government to all areas or conversely to convert the two-tier levels to one tier.4

Municipal amalgamations have also been controversial in the Province of Ontario. Proponents of amalgamations argue that the quality of services will improve and that economies of scale and economies of scope will reduce costs, whereas opponents argue that costs will increase due to more bureaucracy, upward equalization of wage and service levels. Furthermore, there would be a loss in local autonomy and identity. During a ten year period between 1996 and 2006, the provincial government either encouraged or imposed amalgamations such that the number of municipalities was reduced from 815 in 1996 to 444 in 2006 and remains unchanged in 2017.

Although economies of scale were a significant factor by the municipalities for the mergers, the Province had additional reasons, such as controlling urban sprawl, ensuring equity between inner city residents and suburbs, eliminating inter-municipal disagreements, reducing the number of cities and the number of politicians, and creating larger cities to enable them to compete internationally (Tindal, Tindal, Stewart and Smith (2013). Currently, municipalities are permitted to merge if they so desire. A determination of scale effects would allow them to evaluate the desirability of merging with other municipalities or consolidating specific services with adjacent municipalities.

The empirical work on the estimation of economies of scale indicates that unlike the private sector, scale effects are not significant for municipalities. For example, Derksen's (1988) study of municipal amalgamations in European countries and Boyne's (1992) review of amalgamations in the U.S. indicate that larger units of local government were likely to operate at higher unit costs than smaller units of government. More recent U.S. studies such as Couch, King, Gossett and Parris (2004), Holcombe and Williams (2009), and Southwick (2012) arrive at similar conclusions as do studies in other countries.5

Canadian studies such as Desbiens (1996), Vojnovic (1998), Sancton (1996), Slack (2000), and Kushner and Siegel (2005), like those for other countries, concluded that economies of scale are not that significant. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.