Despite a broad consensus on the need to take into account the value of public services in distributional analysis, there is little reliable evidence on how the inclusion of such non-cash income actually affects poverty and inequality estimates. In particular, the equivalence scales applied to cash income are not necessarily appropriate when including noncash income, because the receipt of public services is likely to be associated with particular needs. In this paper, we propose a theory-based framework designed to provide a coherent evaluation of the distributional impact of local public services. The valuation of public services, identification of target groups, allocation of expenditures to target groups, and adjustment for differences in needs are derived from a model of local government spending behaviour. Using Norwegian data from municipal accounts and administrative registers we find that the inclusion of non-cash income reduces income inequality by about 15 percent and poverty rates by almost one-third. However, adjusting for differences in needs for public services across population subgroups offsets about half the inequality reduction and some of the poverty decrease.

Abstract:The purpose of this paper is to provide an evaluation of how local public in-kind benefits affect the distribution of income in Norway. To this end, a method that accounts for differences between municipalities in capacity to produce the same standard of public services is used for assessing the value of sector-specific local public services in each municipality. Moreover, recipient frequencies in various demographic groups are used as basis for determining the allocation of the assessed value of services on citizens of the municipalities. The empirical results show that inequality in the (marginal) distribution of municipal in-kind benefits is rather high. The contribution of municipal in-kind benefits to inequality in the distribution of extended income (cash (after-tax) income plus municipal in-kind benefits) proves, however, to be approximately neutral.

Many countries apply cost-equalization and/or fiscal capacity equalization formulas to enable subnational governments to provide comparable service standards at comparable tax rates. This paper demonstrates how measures of expenditure needs and fiscal capacity can be derived from a structural model of local government spending and taxing behavior. The structural parameters are shown to provide the information required to implement equalization according to the principle of horizontal equity.

Abstract:The standard practice in most OECD countries is to identify the poor on the basis of a country-specific poverty line defined as a fraction of the median equivalent income. However, this approach disregards regional differences in prices and needs within a country and may, therefore, produce results that give a misleading picture of the extent of poverty as well as the geographical and demographical composition of the poor. To account for differences in prices and needs, this paper introduces an alternative method for identifying the poor based on a set of region-specific poverty lines. Applying Norwegian household register data for 2001 we find that the national level of poverty is only slightly affected by the change in definition of poverty line. However, the geographical as well as the demographical poverty profile are shown to depend heavily on whether the method for identifying the poor relies on region-specific or country-specific thresholds. As expected, the results demonstrate that the analysis of poverty based on country-specific thresholds produces downward biased poverty rates in urban areas and upward biased poverty rates in rural areas. Moreover, when region-specific poverty thresholds form the basis of the poverty analysis, we find that the poverty rates among young singles and non-western immigrants are significantly higher than what is suggested by previous empirical evidence based on a joint country-specific poverty line.

When private goods are publicly provided at subsidized prices, government authorities have to determine the distribution of services on recipients. The distribution of services according to need is frequently referred to as an important policy goal. Thus governments are assumed to develop standards for evaluating the relative needs of different clients. This paper analyses the impact of needs and economic constraints on the distribution of public home-care in Norway. The empirical results show that individual needs have a significant effect on the distribution of home-care. Another finding is that local public authorities with higher disposable incomes meet client needs better. Finally the results are utilized to derive a measure of client-specific need.