The tiny municipality of Lestijärvi gives out a baby bonus of €10,000 to the families of babies born within the municipality.
The sum is paid over ten years of installments of €1000, if the family keeps living in Lestijärvi. Therefore, the municipality is attempting to bribe its residents to have children, or to make couples planning on having children to move to Lestijärvi.
It is obvious that municipalities should not be doing this. Lestijärvi is the second smallest municipality in mainland Finland, with a population of under 800 residents. Naturally, municipal politicians fear that the municipality will be merged with one of its neighboring municipalities, as should already be the case. The baby bonus is just a way to prolong the inevitable municipal merger.
Municipalities should not be bribing people to influence their decisions to relocate. It’s a zero-sum-game, when people decide where to live. If a person decides to move to Lestijärvi, another municipality loses a resident. This bribing is reducing welfare, since that move to a place because of a bribe are settling in a place that would not be their first choice otherwise.
How can a small municipality of 789 residents afford this type of donation? The money comes from taxpayers in the rest of Finland.
The Lestijärvi baby bonus is paid for by others
In Finland, municipalities are subsidised by the state so that they can provide necessary services, such as healthcare and education.
The size of the subsidy is determined, among other things, by the age composition of the population and morbidity levels.
The goal is to ensure that all municipalities have enough resources to maintain basic services. In addition, the system includes an equalization mechanism, where wealthy municipalities have their state subsidies decreased, so that less wealthy municipalities can get a bit extra.
Because of the equalization mechanism, Helsinki gets €325 million less than it would get otherwise. Correspondingly, municipalities like Lestijärvi get more than they otherwise would.
This mechanism is overblown and results in a situation where state subsidies pay for just 4% of total spending by the city of Helsinki, while the same figure is around 40% in Lestijärvi.
Because of the oversized state subsidies, Lestijärvi can afford to use tax money raised in other parts of the country in their attempt to continue existing.
Institute For Economic Research: State subsidies slow down urbanization and decrease welfare
The benefits of urbanization have been a hot topic in Finnish public discourse and demands have been made for the government to promote it further. Mainly members of the Centre Party consider urbanization a negative trend that should not be encouraged.
A well-designed state subsidy system should ensure that basic services can be provided to everyone, regardless of where they live.
At the same time, it should be able to take into consideration regional differences in productivity, so that it does not encourage people to live in areas of low productivity.
According to the VATT Institute for Economic Research, Finnish tax and state subsidy systems strongly encourage people to live in areas with low productivity.
The report states “for example, a family living in Fell Lapland is incentivised by several thousands of euros a year not to move to the Helsinki region.” Finland has and continues to implement a strong policy of anti-urbanization, with the state subsidy system being one part of it.
For Finland to have a real urbanization policy may be too much to ask for but as a first step we could stop bribing people to live in places, where they would not otherwise live.