When Fewer People Looks Like Better Finances
The Hidden Illusion in Shrinking Towns
Nerea Almela-López, Bernardino Benito, María-Dolores Guillamón, Ana-María Ríos (University of Murcia- all authors)
In many small towns, public finances seem to improve at exactly the moment things are getting worse.
Fewer residents… but higher spending per person.
Fewer people… but more revenue per inhabitant.
At first glance, this sounds like good news. But our research shows the opposite: in many shrinking municipalities, these “improvements” are largely an illusion. Across Spain—and in many other countries—rural areas are steadily losing population. This trend is often discussed as a social or demographic problem. But it also has a less visible consequence: it changes how we measure and interpret the financial health of local governments.
The problem: the numbers can mislead
Our main finding is simple, but easy to overlook: When population declines, “per capita” indicators can go up—even if the underlying financial situation is not improving.
Why does this happen? Because these indicators divide total spending or revenue by the number of residents. If the population shrinks, the result increases automatically—even if nothing else changes.
Imagine a town that spends €1 million a year. With 1,000 residents, that’s €1,000 per person. If the population drops to 800 and spending stays the same, the figure rises to €1,250 per person. It looks like improvement. But nothing actually improved. This basic arithmetic effect plays a much bigger role in public finance than we usually acknowledge.
What we found in Spain’s small municipalities
We analyzed nearly all Spanish municipalities with fewer than 20,000 inhabitants—over 7,700 in total—between 2015 and 2022. This includes the vast majority of local governments in the country.
The pattern is clear and consistent:
Spending per capita increases as population declines
Revenue per capita also increases
In the smallest towns, even debt per capita tends to rise
At face value, these results could suggest that shrinking municipalities are becoming more financially robust. But that interpretation would be misleading.
What we are actually observing is the interaction between stable—or slowly changing—budgets and a shrinking population base.
The cost of doing the same with less
One of the clearest findings concerns public spending. As municipalities lose population, spending per resident tends to increase. This is not because local governments are expanding services. In fact, the opposite is often true. The explanation lies in the nature of local services. Many essential services—such as waste collection, street lighting, road maintenance, or basic administration—have significant fixed costs. These costs do not fall in proportion to population decline. A town cannot halve its road network just because half its residents leave. Nor can it easily reduce administrative structures below a certain threshold. As a result, fewer residents must share roughly the same costs. The outcome is higher spending per person. This is not a sign of efficiency. It is a sign of structural pressure.
More revenue… but not more capacity
We observe a similar pattern on the revenue side. In many shrinking municipalities, revenue per capita increases. This seems counterintuitive, since population decline is usually associated with weaker economic activity and a shrinking tax base. But again, the explanation lies in how the indicator is constructed. Two mechanisms are at work:
Population decline mechanically increases per-person figures
Municipalities may adjust taxes or fees to maintain service provision
In other words, local governments often try to compensate for demographic decline by mobilizing more resources from a smaller population. Importantly, our analysis shows that this increase is driven mainly by local taxes, not by stronger financial support from higher levels of government. Intergovernmental transfers—funds provided by regional or national authorities—only partially offset the effects of depopulation. In many cases, they do not fully reflect the higher costs faced by sparsely populated areas. This means that municipalities are often left to absorb the pressure themselves.
The smallest towns face the greatest strain
The effects of depopulation are not uniform. They are most intense in municipalities with fewer than 1,000 inhabitants—places where demographic decline is often most pronounced and resources are most limited. These towns typically face a difficult combination:
Limited administrative capacity
Narrow revenue bases
Reduced flexibility in managing budgets
In this context, we find clearer evidence that debt per capita increases as population declines. This suggests that the smallest municipalities may be relying more heavily on borrowing to cope with persistent financial pressures.
Why this matters
At first glance, this might seem like a technical issue about statistical measurement. But it has real-world consequences. If policymakers, analysts, or the public rely too heavily on per-capita indicators, they may draw the wrong conclusions about the financial health of local governments. A municipality may appear to be improving—showing higher revenue or spending per person—when in reality it is struggling to maintain basic services with fewer residents. This misinterpretation can affect funding decisions, policy design, and public debate.
Rethinking how we measure—and support—local governments
Our findings point to several important implications. First, we need to be more cautious when interpreting standard fiscal indicators. “Per capita” does not always mean “better.” In shrinking municipalities, it may mean the opposite. Second, funding systems need to better reflect the realities of demographic change. In Spain, as in many countries, financial transfers to municipalities depend heavily on population size. But this approach overlooks a key fact: sparsely populated areas often face higher per-person costs, not lower ones. Ignoring this can leave the most vulnerable municipalities underfunded. Third, there is a need to rethink how local services are organized and delivered. Possible solutions include:
Greater cooperation between municipalities
Shared service provision
Stronger coordination at regional levels
More flexibility in local taxation
These approaches can help small municipalities adapt to demographic decline while maintaining essential services.
A broader lesson
Although this study focuses on Spain, the underlying issue is far from unique. Many rural and shrinking regions across Europe and North America face similar dynamics: declining populations, rising per-capita costs, and increasing pressure on local governments. The key lesson is simple but powerful: When towns lose people, the numbers can look better—but tell a worse story. Understanding this gap between appearance and reality is essential. Without it, well-intentioned policies may fail to address the real challenges facing shrinking communities. Depopulation is not just about fewer people. It is about how institutions, services, and financial systems adapt—or fail to adapt—to that reality. And sometimes, the first step is simply learning how to read the numbers differently.
Nerea Almela-López is a researcher at the Department of Accounting and Finance, University of Murcia (Spain). Her research focuses on local public finance, fiscal sustainability, and the economic implications of demographic change, particularly in small and rural municipalities. She has participated in research projects on territorial inequality and municipal financial performance, with an emphasis on measurement issues in per-capita indicators and the challenges posed by depopulation for local governments.
Bernardino Benito is Professor of Accounting and Finance at the University of Murcia (Spain). His research focuses on public sector accounting, local government finance, transparency, and fiscal sustainability. He has published extensively in international journals on municipal financial performance, efficiency, and governance. He has contributed to numerous national and international research projects on public sector accountability and the financial management of subnational governments.
María-Dolores Guillamón is Professor at the Department of Accounting and Finance, University of Murcia (Spain). Her research focuses on fiscal transparency, public sector accounting, and financial sustainability in local governments. She has published in international journals on accountability, reporting practices, and the determinants of municipal financial performance, with particular attention to transparency and governance.
Ana-María Ríos is an Associate Professor at the Department of Finance and Public Sector Economics, University of Murcia (Spain). Her research focuses on public economics, local governance, and fiscal sustainability, with particular attention to transparency, budgeting, and municipal financial performance. She has contributed to several research projects on demographic change, public service provision, and the determinants of fiscal outcomes in local governments.