The Effect of Redistribution on Government Spending in Swedish Municipalities

Sammanfattning: There is an ongoing debate regarding the efficient use of public spending in Swedish municipalities. Earlier research states that intergovernmental redistribution, such as the Swedish equalization system, cause a flypaper effect and increase the regional government spending. We examine the relationship between the equalization grant and government spending by running regressions of costs for different municipal activities and grant. Further, we analyze reasons behind the possible relationship by looking at the spending pattern and examining whether grant increase the quality of public services as perceived by the municipal citizen. Our results indicate that a flypaper effect exists in Sweden. Some results deviate from our findings, but they are likely to have a small impact on our overall conclusion. We found that the grant did not increase the perceived quality and that the increase in spending is not biased towards any specific activity. The purpose of the equalization system, to create equivalent welfare in the entire country, was thus fulfilled. After analyzing our results further, we argue that the increase in spending is most likely due to inefficiency.