Real and perceived effects of changing the grant system from specific to general grants

The paper is based on a study of the 1993 Finnish grant reform, changing from a system with earmarked matching grants to a system with general, non-matching grants. The analysis of cross-sectional data confirms the “fly-paper effect” and also that matching grants have a stronger stimulating effect than non-matching grants on local expenditure. The fly-paper effect is then modified to take account of the distribution of power inside local government. The change to general grants without central government supervision might mean more power to the central management in the local government and a diminished power for sector officers and groups dependent on the sector services. Perceptions of principal actors in the local government budget process were that the reform changed the distribution of power, in some municipalities to the disadvantage of locally small weak groups that could benefit under the old system of earmarked matching grants.