Party System Fragmentation and Budgetary Outcomes at the Local Level: Evidence from Finnish Municipalities

Municipalities are key actors in the Finnish welfare state model. They collect a notable share of all taxes, employ a large fraction of the workforce and provide a number of services that people encounter in their everyday lives. The financial standing of municipalities, however, varies considerably, which has raised doubts about the sustainability of the system. The purpose of this study is to investigate whether and how the partisan composition of municipal councils explains this variation. Special emphasis is on different aspects of ‘fragmented’ decision-making, including the number of parties and the distribution of bargaining power that results from the ability to turn losing coalitions into winning ones and vice versa. There are theoretical reasons to expect that the fragmentation of decision-making power among several parties leads to short-sightedness, which becomes visible in persistent deficits and spending increases. However, the empirical evidence for this argument has been mixed. The structure of the Finnish political system at the local level, such as the lack of clear government–opposition division and the co-existence of single-party majorities and highly fractionalised party systems, provides an opportunity to re-test and reconsider arguments about the budgetary consequences of multiparty decision-making. Hence, the results have relevance beyond the Finnish case. The dataset used in this study covers the Finnish municipalities from 2001 to 2014.