The effects of local government spending on poverty in Norway

Abstract

Most studies on poverty are based solely on a cash income definition. Smeeding et al. (1993) suggest a possible explanation for this when stating: "The problems inherent in the measurement, valuation and imputation of non-cash income to individual households on the basis of microdata files are formidable". Furthermore, the analysis of this problem is limited in many countries due to lack of sufficient data. Norway has an established extensive data register system in addition to a relatively large public sector where municipalities are given a key role in the provision of public services. This makes Norway an attractive country to study with the intention of measuring the benefits from public services. By applying methods of valuing and allocating public services on an individual basis, Aaberge and Langørgen (2006) show that we are able to construct an extended income measure that includes important benefits such as education, childcare, health care and care for the elderly and disabled. Aaberge and Langørgen (2006) have applied this extended income measure in an analysis on the distribution of income. In this paper we will now look at the impact on poverty of including the value of public services by studying the share of poor in the population when we apply income after tax as the relevant income measure in comparison to applying the extended income measure. In order to study the development over time, we have chosen to look at the period 1993-2001, a period that includes both a soaring boom and the start of a recession. One of the main findings of the analysis is that the probability of becoming poor is greatly reduced when we add the value of public services to cash income. Furthermore results also show that almost no one gets worse off when public services is included in the income definition. In other words, almost no one is classified as non-poor when income after tax is applied and is at the same time classified as poor when extended income is applied. Overall, based on our results, we may conclude that the addition of public services in the income definition has a great impact on the results of a poverty analysis. Including public services is clearly a step in the right direction of a more comprehensive and complete income measure. Public services such as health care, childcare and care for the elderly and disabled are not necessarily targeted towards the lowest part of the income distribution, but the impact on poverty is nonetheless substantial.