OVERVIEW OF FISCAL DECENTRALISATION
The organisation of the government in Denmark is based on a three-tier structure: the central government, five regions and 98 municipalities. For the purpose of this study, regions and municipalities form the sub-national government level.
Legal acts governing fiscal decentralisation
The Constitution establishes the principle of municipal autonomy under the supervision of the state. Regions were established with the Local Government Reform of 2007.
Every year the Government signs an agreement with the Municipalities National Association and the Regions National Association establishing the budget for the following year and setting boundaries for current and capital expenditure and targets for sub-national taxes. This agreement is signed on behalf of regions and municipalities as a whole and allows for a certain degree of flexibility at the level of single municipality/region.
Qualifying fiscal decentralisation
Municipalities, which are responsible for the majority of sub-national spending, enjoy a high degree of fiscal autonomy. Their activities are financed through the municipal income tax, the land value tax, a fraction of the corporate income tax, user charges and transfers from the central government (grants and reimbursements for specific expenditures). Municipalities are free to set the municipal income tax, which represents roughly 88.7% of their tax revenues, as they wish. Regarding the tax on land value, municipalities are able to choose a tax rate of between 1.6% and 3.4%. Conversely, the autonomy of and fiscal decentralisation towards regions is much lower. Regional activities are entirely funded by block grants and activity-based funding from the central government. The national government collects local taxes and allocates funds to sub-national governments each month.
Overall, the majority of Danish public expenditure (65% in 2018) occurs at the sub-national level (see the pie chart below).
Source: authors’ elaboration on EUROSTAT data. For further details, see
methodology.
Fiscal equalisation mechanisms
Given the variations in the tax base of Danish municipalities (reflecting differing demographic and social structures), the Local Government Reform of 2007 established an equalisation mechanism transferring resources from the richer municipalities to the poorer ones. The purpose of the equalisation system is to ensure that the same level of service involves an analogous tax rate regardless of the income of the inhabitants and any demographic factors.
Fiscal equalisation across regions does not require such a system, as national government grants constitute the most significant element of financing. In order to give regions equal opportunities to provide healthcare services, the subsidy is distributed along a number of objective criteria (e.g. demography and social structure of each region) reflecting the expenditures required.
LEVEL OF FISCAL DECENTRALISATION
Revenue autonomy (own revenue relative to total resources available) at the local level (regions and municipalities) is slightly lower than the EU average (42% versus 53% in 2018), which entails a rate of dependency on central government transfers that is above the EU average (58% versus 48% in 2018). Local own revenues represent 27% of total government revenues in 2018, a value higher than the EU average (13%).
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.
The composite ratio, which captures aspects of fiscal decentralisation of both revenues and expenditures, suggests that Denmark has a degree of fiscal decentralisation that is substantially above the EU average (79% versus 16% in 2018). This highly decentralised system is also confirmed by the indicator measuring tax autonomy of local governments: the indicator shows that local governments have full discretion over the tax rates relating to 88.7% of their total tax revenues.
Source: authors’ elaboration on EUROSTAT data. For further details, see
methodology.
FISCAL RULES AND BORROWING CAPACITY
Municipalities and regions can finance budget deficits through debt within specific limits defined by the Ministry of Finance. Municipalities have access to debt markets through their credit institute (kommunekredit); they can also issue bonds and, under special conditions, guarantees. Municipalities are allowed to underwrite loans corresponding to the sum of expenditures in the fiscal year only for specific purposes: to finance capital expenditures, to pay off existing loans and to finance the costs of deferred property values taxes granted to pensioners.
Regions are more limited in their borrowing capacity and, in general, are not allowed to underwrite debt or to issue guarantees without a dispensation from the Ministry of Economics and Internal Affairs.
Deficit and debt at sub-national levels
In 2018, the consolidated gross debt of the Danish local government sector represented 6.6% of GDP having fallen an overall 0.6 percentage points over the past four years.
Source: authors’ elaboration on EUROSTAT data. For further details, see
methodology.
EXPENDITURE BY GOVERNMENT LEVEL AND BY POLICY AREA
Expenditures of regions and municipalities represent a significant part of total general government expenditures in the fields of health (almost the totality at 98%), social protection (84%), environmental protection (55%), education (46%), recreation, culture and religion (46%) and housing and community amenities (43%).
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.
Regions and municipalities' spending is particularly concentrated in the field of social protection (56% of the total budget of both entities). Other relevant areas of spending are healthcare (24%) and education (9%).
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.
