To respond to the low birth rate/aging population issue that has worsened since the mid 2000s, welfare programs based on national policy have steadily increased. Due to such an expansion of welfare programs, which rely on matching funds by the central and local governments in general, the financial burden on local governments has increased along with the central government's subsidies, resulting in complaints of financial difficulties from local autonomous entities. Realistically, however, it is also difficult for the central government to support all such expenditures. 

The low birth rate/aging population issue is difficult to resolve in the short-term, and more financial investment is expected going forward. Furthermore, due to the outlook of prolonged low growth, it seems to be unlikely that the revenue of the central government and local authorities will increase. Therefore, the difficulties and conflicts surrounding welfare and finance will continue to worsen in the future, and now is the time when we need mid- to long-term measures to resolve them.

Against this backdrop, this report analyzed the impact of the recent expansion of welfare programs on local finance and presented key initiatives that the central government and local entities should carry out to ensure the sound functioning of local finance in response to such impact.

The analysis results showed that measures to alleviate the burdens on local expenditure driven by the expansion of welfare programs are required going forward in consideration of the financial conditions of the local entities. For example, it is necessary to consider adjusting the standard rate system so that when local expenditures expand due to changes in central government policies, the local autonomous authorities bear only the burden of naturally increased local expenditure, while the central government temporarily bears the burden of additional increases. 

The report also proposed the need to redesign the differential rate of national subsidies to ensure that the financial conditions of local autonomous entities and the actual welfare demands are appropriately reflected and that its fiscal equalization function is closely linked to the same functions of the current local share tax and the metropolitan city revenue sharing scheme. Moreover, regarding the current local share tax system, the report also proposed the need to seek ways to make the calculation method of the standard amount of fiscal demand more realistic and to include autonomous districts in the list of recipients. For example, it is necessary to consider adding autonomous districts to the list of recipients of the current local share tax. At the same time, separate methods of calculating standard amounts of fiscal revenue or demand from the methods for the basic entities of si (city) and gun (county) should be introduced, or standardizing the current metropolitan city revenue sharing system should be carried out with the addition of "the amount for autonomous districts among the current local share tax of the metropolitan city" as a source of finance to the current "a certain ratio of the ordinary tax of the metropolitan city." Finally, the report also presented ways to improve the efficiency of welfare finance based on communication and cooperation between the central and local governments.