Local authorities shall be entitled, within national economic policy, to adequate financial resources of their own, of which they may dispose freely within the framework of their powers.
In the area of financial resources and budgets, Danish municipalities enjoy great freedom with regard to their revenues and financial management of their resources. The financial equalisation system in Denmark is based on the size of local authorities’ structural surplus/deficit, i.e. on the difference between the municipality’s revenues calculated on the basis of an average rate of taxation and its spending needs. In the case of the financially weakest municipalities, equalisation thus guarantees certain uniformity in the level and quality of services. Furthermore, the system for allocating the financial resources needed to carry out a public task is based on the “expanded total balance” principle (Det Udvidede Totalbalanceprincip (DUT)), which guarantees a balance between the tasks assigned to municipalities and their financial resources. The “DUT” balance principle means that the state allocates funds to municipalities and regions in line with trends in their expenditure. The operation of the principle is based on the total State grant, which may be increased or reduced depending on whether or not certain responsibilities are delegated to municipalities and regions. The “DUT” principle covers both expenditure and revenue.
Where budgets are concerned, Denmark has a budget guarantee system (Budgetgarantien) for local authorities under which the grants awarded to municipalities reflect the cyclical variations in their costs. The aim is to protect municipalities from cyclical expenditure. Hence, the total grant paid to local authorities is adjusted annually in line with the variation in total expenditure, less expenditure meaning a smaller grant. The budget guarantee covers the net expenditure of the worst affected municipalities, thus guaranteeing that the local authorities concerned continue to discharge their responsibilities.
The regions do not have financial resources of their own. Their revenues are derived to a large extent from the State and to a lesser extent from the local authorities, as the regions have the right neither to levy taxes nor to borrow from the national capital market. The association of regions regrets that the recently adopted budget law put an end to the debate on granting the regions the right to levy taxes.
The financial resources allocated to local authorities for the discharge of their responsibilities are governed by law LBK no. 797 of 27 June 2011 on local and regional finances (Bekendtgørelse af lov om regionernes finansiering). The financing of Denmark’s regions rests on three main pillars: the health sector (which includes hospitals and health insurance), regional development and educational and social institutions. The health sector accounts for roughly 90% of the total budget of regional expenditure. As a matter of principle, the budget earmarked for one of these fields cannot be used in the other two.
Regional funding is derived from state grants and local authority contributions. The health sector, for example, is financed by State reimbursements (block grants), State grants and contributions subject to local authority activity.
Public deficits have increased (2.7% of GDP in 2009) after several years of surplus. Local authority finances in particular are in deficit. A third of municipalities have balanced their finances by drawing on their reserves, while in the other cases the State has sometimes had to take over financial responsibility and place the local authorities under supervision. After a major shortfall in financing in 2010, some 600 million DKK were reportedly needed to balance the books in 2011.
Local authority expenditure is particularly high. In 2010 it accounted for 38% of GDP and 65% of all public spending. The municipalities receive tax revenues (mainly from income, corporation and land tax), State grants and proceeds from services. Income tax is the main source of local authority revenue (over 70%).
According to the Ministry of the Economy and the Interior, the budgetary situation of local authorities has been reversed since 2011, going from deficit to surplus. In 2012, the cost of municipal services was 5.3 billion DKK less than the amount budgeted for that year. The 19.5 billion DKK of gross capital expenditure funded from taxation in 2012 was also lower than expected, although the level remains high.
The main state grant represents ¾ of the health sector’s expenditure, which totalled nearly 81.5 billion DKK in 2012. This grant is calculated, on the one hand, from a base amount linked to population size and, on the other, from a number of objective criteria taking account of each region’s spending needs, including the average age of the population and the socio-economic structure.
Municipal financing varies from one municipality to another, depending on the size of their population. There is a complex grant and equalisation system designed to offset disparities between municipalities and thus guarantee the discharge of their responsibilities and the delivery of services to citizens.
Local authority revenues are derived from taxation, and specifically from the following taxes: income tax; land tax; corporation tax; other taxes and charges.
Income tax and land tax are local taxes. Local income tax is collected by the State at the same time as national income tax, whereas land tax is collected directly by the local authorities. The local authorities are free to set the rate of income tax or the rate of tax levy. The local authorities assess land tax according to the value of the land. In municipalities, the municipal council sets the rate of land tax.
Tax rates are decided by the municipal councils themselves within the limits laid down by law and defined in the annual negotiations between the Ministry of Finance and the LGDK). The government has significantly tightened these limits several times in the last few years, following the economic crisis of 2008.
Some properties can be exempted from land tax, such as private schools, not-for-profit institutions, sports facilities and museums.
The system for allocating the financial resources needed to carry out a public task is based on the “expanded total balance” principle, which guarantees a balance between the tasks assigned to municipalities and their financial resources. This principle is known in Danish as Det Udvidede Totalbalanceprincip or DUT, as explained in para. 94. The cost of a new task is calculated initially by the relevant Ministry, and then submitted to the LGDK. If the association disagrees with the calculation, the matter is considered by a group of civil servants and, if necessary by the relevant Minister and the Chair of the LGDK. The sums allocated in this way are calculated on the basis of averages and, consequently, the sum awarded to a given municipality is not always commensurate with local needs. However, local authorities are free to use both the sums allocated via the DUT and their own tax revenues as they wish, which means that the system works properly in practice. The payments due to the regions/local authorities under the DUT, is effected as part of the payout of the grant from the State.
Any changes of rules both in form of laws, regulations and circulars and also recommendations and guides can modify the amount of the State’s grants to regions/local authorities. Also judgments from administrative courts or from the ordinary courts creating a new legal situation can modify the existing level of grants. It is thus not the formal basis of a change of regulation, but the real effect that is determinant.
A new financial equalisation system was introduced in 2007. Financial equalisation is based on the size of local authorities’ structural surplus/deficit, i.e. on the difference between the municipality’s revenue calculated on the basis of an average rate of taxation and its spending needs. One of the aims of the Danish grant and equalisation system is to reduce the variations in “tax value” observed from one municipality to another. This “tax value” (or tax/service ratio) is defined as the ratio between the volume of expenditure corresponding to the public services provided and the tax levied. The differences in tax/service ratios may be due to the fact that the per capita cost of a given service differs from one municipality to another. To make a concrete assessment of spending needs, several factors have to be taken into account, such as the number of children not yet of school age, the number of children attending school, the number of elderly persons etc. Tax variations may also be explained by differences in the tax base, which reflects the value and revenue potential of the municipality’s landed properties. Without equalisation, there would be very large differences in the tax/service ratio from one municipality to another, i.e. considerable differences in the standard of service, tax pressure or both of these parameters. Hence, a municipality with a broad tax base or low expenditure could set a low rate of taxation and nevertheless be able to offer a high standard of service, whereas a municipality with a narrower tax base or high expenditure would have to set a high rate of taxation in order to able to offer an acceptable standard of service.
Local authority budgets are negotiated each year between the association of municipalities and the central government and laid down in an agreement in which the government also takes account of the implications of the economic crisis for local authorities, such as unemployment, youth employment programmes etc. Except for investment in public services or in priority areas of their political programme, local authorities require prior authorisation from the Ministry of the Economy and the Interior to contract loans. If local authority expenditure exceeds the annual budget, the government can impose penalties, such as a reduction in the central government contribution for the following year.
The regions cannot make free use of their resources, which are divided into three sections corresponding to their three major areas of responsibility. The regional councils are obliged to respect that division. Because local authority budgets account for a large proportion of public spending, the State’s increasingly strict oversight of local budgets as a result of the crisis is generally well accepted, not only by the Parliament, but also by the population at large.
There are legal restrictions relating to investment, borrowings, tax and staff, introduced under agreements concluded freely between the central government and the LGDK and Danske Regioner (Danish Regions).
The grants awarded to local authorities are of two types: earmarked grants and block grants. The former are intended to finance specific items of expenditure, while the latter have no specific purpose. Local authorities may also receive grants awarded under the statutory financial equalisation arrangements.
One of the aims of the Danish grant and equalisation system is to reduce the variations in “tax value” (or the tax/service ratio). This is the ratio between the standard of service provided and the tax levied.
The other sources of revenue consist mainly of charges and duties. The most important of these are: - public services: local authorities provide public services (sewage disposal, waste disposal, gas, electricity, heating and water supply); - private and public nurseries: the cost to parents is laid down by law; - care for the elderly: elderly persons housed by the municipality are required to pay a rent, and also their electricity and heating.
Other revenue is derived from the return on capital and investments, and chiefly from the sale of property and net financial interest.
Local authorities have access to the capital market, but in this area they are subject to strict oversight by the State, which monitors local authority investments to ensure that local budgets are consistent with national needs and requirements.
The Danish public sector is heavily influenced by methods originating in the private sector (new public management). Local authorities and regions can set up local public enterprises; the State supports all kinds of public-private partnerships. However, there are many limits to be observed when setting up public enterprises: these include rules guaranteeing that local authority and regional tasks remain under the responsibility of local and regional councils and, furthermore, that the rules of competition are complied with.
The rapporteurs conclude that Article 9 of the Charter is partially complied with in Denmark. From the standpoint of Article 9 para.2, it would seem that responsibilities in respect of the health sector are prioritised in relation to other responsibilities, in terms of the allocation of resources. As regards Article 9 para.3 of the Charter, the regional level does not have the right to determine the rate of taxes, a fact which is criticised by the Association of Regions. Furthermore, the number of responsibilities assigned to the regions is very small, and their room for manoeuvre is even smaller since they do not have financial resources of their own. The financial equalisation system does not fully satisfy the needs of local authorities and warrants improvement. Lastly, with regard to Article 9 para.8, access by local authorities to the capital market is subject to sometimes strict state oversight.