THE EFFECTS OF CHANGE IN GRANTS-IN-AID REGIME AND CUTS ON GRANTS ON MUNICIPALITIES’ EXPENDITURES IN FINLAND
In this preliminary paper the effects of change in grants-in-aid system and grant cutbacks on the municipalities’ operating expenditures are examined using two panel data sets: 1986-1992 covering the matching grants system and 1994-1996, covering the new general grants system. The paper compares the effects of grants in these two grant systems. The effect of matching grants system to municipal expenditures is found to be highly stimulative. The estimations using data from general grant system show that the effect of the grants to operating expenditures is considerably lower than in the matching grant system. This supports the hypotheses that the change from matching grants system to general grants system and the cuts on grants constrain municipalities’ propensity to consume the aided services.