Over the past 20 years since the implementation of the local autonomy system in Korea, many changes have been made to local finance. The absolute fiscal scale expanded, and the portion of intergovernmental grants continued to increase. However, the pr...
Over the past 20 years since the implementation of the local autonomy system in Korea, many changes have been made to local finance. The absolute fiscal scale expanded, and the portion of intergovernmental grants continued to increase. However, the proportion of local to national tax is still far below the 80:20 structure and the autonomy of local finance to secure the responsibilities of local governments has shrunk as intergovernmental grants have expanded. In addition, the expansion of the large-scale grants-in-aid programs, due to the policy change of the central government, has continued to increase the burden of local expenditures, exacerbating the local finance. Despite the various fiscal control systems being operated, the fiscal soundness of local governments is not secured.
Based on the recognition of these problems, this study analyzed the contents and results of the reform of local fiscal systems after the enforcement of local autonomy in Korea. The change of the local fiscal system in Korea has been reorganized as a means to achieve a specific policy goal under the leadership of the central government, anchored on the national tax. The function of intergovernmental grants, meanwhile, has become more complicated and for the local government, it has been difficult to reflect opinions in the policy decision making process in local tax reduction and exemption. As a result, expenditure increased faster than tax revenue; the amount of local tax reduction and exemption increased rapidly, so it had an effect on limiting autonomy of local finance. In addition, changes to grants-in-aid based local finance coordination system of Korea required securing additional financial resources of local governments due to local government transfer of grants-in-aid programs and the expansion of local matching funds related to social welfare. In turn, it weighed on to burden the local finance.
This study analyzes the period from 2007 to 2014 during which time, by double-entry bookkeeping were made available for 16 metropolitan local governments in Korea, and panel analysis was conducted on factors affecting debt-asset ratio. The main results of the analysis are as follows:
First, the ratio of local governments' own revenue and the ratio of total expenditure excluding grants that represents decentralization, decreased the debt-asset ratio. The results suggest that if local governments give autonomy to decision making about funding and spending of finances, the debt-asset ratio will be lowered, positively affecting the fiscal soundness of local governments. Furthermore the fact that both revenue and expenditure decentralization show the same results indicates that it is important to strengthen autonomy in the process of operating local finance. In the end, local governments should make institutional improvements so that they can operate financially with autonomy from the central government.
Second, when the heads of local governments are members of the ruling party, the debt-asset ratio decreases. This is due to the political influence of the head of the local government; In the case of the central government and the local government, the link between local government income and expenditure is strengthened and the debt-asset ratio is lower, so that it is positively affecting in securing the fiscal soundness of local governments. In addition, the re-election of the head of the local government did not yield meaningful results but when the head of the local government is a member of the ruling party, meaningful results were obtained. This suggests that it is necessary to strengthen fiscal policy in the framework of financial relations with the central government, rather than the fiscal policy that reflects the preference of residents in terms of the fiscal soundness of local governments.
This study is distinguished from the previous studies in the following aspects:
First, the changes of the local fiscal system over the last 20 years since the local autonomy in Korea were summarized and the results were evaluated in terms of the fiscal soundness of local governments. In particular, the analysis examines at changes in fiscal decentralization in terms of institutional aspects, and evaluated fundamental achievements such as the level and structure of intergovernmental fiscal by using the local financial statistics of the last 20 years. This analysis will be an important resource for understanding the characteristics of fiscal decentralization in Korea.
Second, there are few studies on local governments and fiscal decentralization from the viewpoint of soundness, and the domestic studies on this are also limited to some primary local governments. In the meantime, most fiscal soundness indicators are calculated from financial information in the form of single-entry bookkeeping, and there has been a limit to fragmentary information. In this study, unlike the previous research, the ratio of debt-asset on bookkeeping by double-entry financial information is used as a fiscal soundness indicator and the analysis aims to panel data for 8 years from 2007 to 2014.
Third, this study considers the socio-economic conditions as well as the political factors and the decentralization of the local government as a whole in determining the fiscal soundness of local governments. It is different from the previous study in that it analyzed considering the political influence that whether the head of the local government belongs to the ruling party and whether it will be re-elected. In addition, the changes in the level of fiscal decentralization are also considered because it affects the fiscal soundness in relation with the central government through the local government and the local community. However, it is difficult to reflect the level of decentralization. As such, this has been excluded in the analysis. This study tried to clarify the determinants of fiscal soundness of local government in accordance with reality by estimating the size of fiscal decentralization by the ratio of local government's own revenue and the ratio of total expenditure excluding grants.
However, this study has the following limitations:
First, it is difficult to generalize the results because it is a relatively short period after the introduction of double-entry bookkeeping system. In addition, this study analyzed 16 metropolitan local governments, and therefore, it does not reflect characteristics of basic local government such as city, county. As such, follow up study can be done from various angles such as increasing the target period and including the basic local government.
Second, due to the realistic constraints, various variables that affect local fiscal soundness could not be utilized. In particular, the fiscal soundness of local governments is difficult to look at with debt indicator alone, and it should be considered comprehensively examining liquidity, solvency, position, and financial performance. Comprehensive analysis has not been conducted because it does not include qualitative analysis such as regional economic trends, feasibility of investment projects, and actual management of funds. Therefore, it will be necessary to analyze the determinants of the fiscal soundness of local governments using various indicators including quality factors.
Third, this study is limited to performing research within Korea to maintain homogeneity of data, so it cannot be generalized and applied to other countries. In order to conduct a cross-national comparative study, it is necessary to consider the unique characteristics of each country such as the socio-economic, political, administrative and cultural characteristics. It is difficult to accurately estimate the unique characteristics of each country as a uniform data of IMF, OECD, and World Bank. In the future, however, if various study results are published through more sophisticated analytical methods and there are accumulations of indicators that reflect sufficient information to represent the unique characteristics of each country accumulate, a cross-national comparative study plans should be sought.
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