Factors Determining Municipal Spending Differences in Latvia

In recent years, local government spending has drawn a lot of attention from policy makers and researchers alike. Scientific literature does not give a clear preference either to centralisation or decentralisation of the provision of public services. The present paper employs econometric methods to obtain evidence pointing to a negative correlation between the size of Latvia's municipalities (novads) in terms of population and municipal spending per capita. Namely, the smaller the municipality, the higher the per capita costs of providing local government services. This is an especially important conclusion, considering Latvia's demographical trends resulting in a particularly notable reduction in the population of small municipalities. We have estimated that, given the declining population, municipalities will be unable to continue fulfilling their functions at the current scope without additional financing. Estimates also suggest that concentration of local government services in administrative territorial units that are larger in terms of population could result in significant savings that could be spent to improve either the supply or quality of services provided by municipalities.