Documentation of the model of local authority economic activity
Introduction
The reform of the local government system on the island of Bornholm on January 1, 2003 raises the question whether the economy of the new Bornholm’s unitary region has improved when compared with the economies of the five municipalities and one county, from which the Bornholm’s regional authority was formed. In order to answer this question it is necessary to construct an economic model to model the changes in the economy of the six local government units to the merged economy of Bornholm’s Region between 2002 and 2003. The reason for using a model is that a number of other changes occurred in the same period, which makes it impossible to claim that the total change observed from 2002 to 2003 expresses the pure impact of the reform. First, prices changed; second, the size and structure of the population changed as well as the taxable income and other sources of finance; third, there are probably secular changes occurring both before 2002 and after 2003. All of these effects must be included in order to capture »other changes« and the impact of the reform.
In addition, there are a number of more general reasons for constructing a sub-model for local government economic activity. First, there is a general interest in identifying and calculating the impacts of local government economic activity, especially on the local economy itself. Second, there is also an interest in describing and modelling the impacts of changes in the local economy on the local government economy. Both areas of interest can be analysed – conceptually and empirically – if a model is constructed.
The first step is identification of the two-way interaction between the local economy and local government. First, the economic importance of local government economic activity is determined, as can be done for other sectors in the economy, for example, the tourism sector. These local government to local economy impacts can also include analysis of the consequences of more limited changes in economic activity due to changes in local government activities. The second step is to model how local government economic activity changes, if local economic activities change (local economy to local government). Changes in the size and structure of the population have implications for the local government economic activity. If production and income in the local economy change, then the demand for local government services and/or the level of taxation change. If prices of commodities or the wage level for local government employees change then demand for local government services in current prices changes.
In relation to the reform of the local government system of Bornholm it is primarily the local economy to local government impacts which are of interest. Later it might also be of interest to include local government to local economy impacts.
Construction of a sub-model for this two-way interaction leads to a number of studies which are relevant for Danish local authorities, especially when discussing future developments, including a global reform of the Danish local government system. First, the sub-model can be used to analyse the sustainability of local government economic units, in the past, today and in the future. Using a number of exogenous assumptions, different measures of the economic strength of local government economies can be established in order to identify whether specific local authorities or groups of local authorities (such as local authorities in rural areas) face specific economic problems in the future. Analysis of existing strengths and weaknesses can also be undertaken from a historical point of view, in order to establish whether local government economic performance has improved or deteriorated because of earlier changes in the local economy or because of internal decisions in the local government economy. Second, if a global reform of the Danish local government system is implemented, the sub-model (together with AKF’s local economic model LINE) can be used to show whether the reform will lead to local authority budget improvements, after corrections for external changes such as changes in population, taxable income etc. have been made.
In this report the sub-model for the local authority economy is presented. First, the concrete project of separating out the impacts of the reform using the model is presented in section 2 together with examination of the concepts of ex-ante and ex-post evaluations of changes applied to the economy of local authorities on Bornholm.
The local authority economy sub-model is part of a more general model for local economic analysis, LINE. In order to illustrate the overall framework for building the sub-model an overview of LINE is presented in section 3. Here, some key concepts related to economic activity which are necessary in order to understand the workings of the local authority economy in the local economy are defined.
In section 4 the structure of the local authority economy sub-model is presented, including a description of the location of the economic activities of the local authority. This includes the function of the local authority as a collective institution with a place of residence where the local authority is located, with demand for its sources, located where the service is provided (the commodity market place) and with the place of production of its production activities (and associated), where the production activities meeting the demand take place.
In section 5 the data sources for constructing the data base used in the Model of local authority Economy are presented.
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