No. 29




The Impact of Amalgamation on the Financial Sustainability of Municipalities in Estonia

  • Janno Reiljan

    Professor of Economics, University of Tartu

  • Annika Jaansoo

    Doctoral Student, Institute of Economics, University of Tartu

  • Aivo Ülper

    Doctoral Student, Institute of Economics, University of Tartu

The goal of the article is to analyze and assess the impact of amalgamations on the financial sustainability of municipalities in Estonia. The article consists of three sections. The first section provides an overview of the discussion in scientific literature, the second section examines the experience of amalgamating municipalities in Estonia and the final section is devoted to a comprehensive empirical analysis and discussion of the impact of amalgamation on the financial sustainability of municipalities based on the financial indicators of Estonian municipalities before and after the amalgamations.

On the basis of the analysis of municipalities’ revenue side it was found that the decrease in grant transfers from the central government budget to local governments is remarkable after the merger of the municipalities, despite merger support from the central government. From the analysis it was therefore apparent that increases in the size of municipalities could have a significant impact on financial sustainability, but the direction of the impact appeared controversial. It was also found that the financial impact of mergers varied greatly in different groups of municipalities, and that financial indicators are sometimes controversial in one group of municipality in regard to a single indicator.

The empirical analysis of the expenditure side confirmed the results of previous studies done in Estonia – municipal administrative expenses decreased after the amalgamations. But the decrease in expenditures was about three times smaller than the overall decrease in revenues.

These kinds of results suggest that the central government policies governing the financial transfers do not increase the financial sustainability of the new municipalities created through amalgamation; rather, these policies are aimed at cost savings for the central government. The financial loss from amalgamation is especially remarkable for small rural municipalities. This also explains why so few mergers have occurred in Estonia during its 20 years of independence.

Full article in Estonian