「Changes in local finance over the past 20 years and improvement plans」 aims to diagnose the structural issues of local finance management over the last 20 years and explore methods for their resolution. To this end, it presents problems and improvement plans based on diverse fiscal information developed through the trends and analysis of fiscal statistics from 1994 to 2013.
Problems of local finance management include the following. The first issue lies with the extensibility/stability/fairness of local tax revenue. The annual growth rate of local tax revenue (8.7%) was lower than the that of national tax revenue (9.0%) from 1993~2012. In particular, as the former was substantially lower than the latter in 2011~2012, the extensibility of local tax compared to that of national tax during that period was even lower than in the overall period. Moreover, the standard deviation of the growth rate of local tax was higher than that of national tax, indicating relatively lower stability. As for the fairness of tax revenue, the tax revenue amount of the autonomous district with the maximum revenue divided by that of the autonomous district with the minimum tax revenue within metropolitan autonomous entities was the highest in Seoul Special City (15.0) and the lowest in Gwangju and Daejeon (2.8). Among the nine provinces, it was the highest in Gyeongsangbuk-do (92.3) and the lowest in Jeju (3.7) as of 2012.
The second issue is the "increase of dependent finances." Given the local finance situation where independent finances are in shortage, the "increase of dependent finances" led by national subsidies can lead to restrictions in public services, where regional preference should be reflected, and the "weakening of fiscal decentralization," causing lower efficiency and accountability in financial management.
Third issue is "poor expenditure management including on national subsidies." There are concerns over the lower autonomy and efficiency in the financial management of local autonomous entities due to the execution of the national subsidy program decided by the central government, a lack of rationality and efficiency in decisions on the execution of certain budget programs as national subsidy programs and the selection of subsidy beneficiaries, etc., and a lack of objectivity and fairness in the application of a standard subsidy rate/differentiated subsidy rate in the national subsidy program.
Last issue is "poor financial management including on financial soundness." While local debt has somewhat decreased recently, the debt of local public corporations has increased by 3.4 times from 2003~2012. The increased debt of local public corporations and entities has not been included in the scope of local finance, leading to lax management as demonstrated by cases in which some programs, supposedly pursued as fiscal programs, were executed as programs by public corporations/entities or private investment businesses.
In response to such problems, improvement plans include: First, while there should be consideration for the benefit principle of public service, a broad source of taxation/low rate taxation, and the expansion of local tax revenue led by local consumption tax and local income tax, which can easily be connected with reinvigoration of the local economy under a challenging financial management environment due to increasing mandatory expenditures, etc. in a forward-looking way, ways to narrow the gap in tax revenue among regions should be pursued, non-tax items/tax-cut ratio should be reduced, and there should be increase of non-tax revenue and improvement of management efficiency to expand independent finances.
Second, reasonable restructuring including systematic improvement of the standard subsidy rate and linearization of the differentiated subsidy rate, etc. is needed for the improvement of efficiency in tax expenditure, and the marginal welfare among areas should become the same through prioritizing the allocation of finances (budget) to areas where welfare can be maximized based on the public demand survey for the reduction of budget waste. Moreover, financial management strategies should be established and executed so that finances' expenditure performance (VFM: value for money) can be maximized for programs in areas/divisions befitting fiscal goals, and overall restructuring between the central government and local governments through the reinforcement of and coordination in mid-term fiscal planning by the central and local governments is needed for improving the productivity of mid-/long-term expenditures or enhancing fiscal performance.
Lastly, to reinforce financial management, local debt and the debt of local public corporations/entities should be managed at an appropriate level, and the efficient issue and follow-up management of local bonds are needed in line with the reinvigoration of the local bond market. Moreover, the annual fiscal balance (flow) and debt balance (stock) should be linked and listed for the improvement of fiscal transparency through the disclosure of fiscal information; the budget and settlement of accounts should be written "together" assuming that they will be compared; and, as budget/settlement items with the same contents in the local finance yearbook are not mutually connected as they are located in different places in lists and scattered, such related items should be integrated through a tree diagram.
Problems of local finance management include the following. The first issue lies with the extensibility/stability/fairness of local tax revenue. The annual growth rate of local tax revenue (8.7%) was lower than the that of national tax revenue (9.0%) from 1993~2012. In particular, as the former was substantially lower than the latter in 2011~2012, the extensibility of local tax compared to that of national tax during that period was even lower than in the overall period. Moreover, the standard deviation of the growth rate of local tax was higher than that of national tax, indicating relatively lower stability. As for the fairness of tax revenue, the tax revenue amount of the autonomous district with the maximum revenue divided by that of the autonomous district with the minimum tax revenue within metropolitan autonomous entities was the highest in Seoul Special City (15.0) and the lowest in Gwangju and Daejeon (2.8). Among the nine provinces, it was the highest in Gyeongsangbuk-do (92.3) and the lowest in Jeju (3.7) as of 2012.
The second issue is the "increase of dependent finances." Given the local finance situation where independent finances are in shortage, the "increase of dependent finances" led by national subsidies can lead to restrictions in public services, where regional preference should be reflected, and the "weakening of fiscal decentralization," causing lower efficiency and accountability in financial management.
Third issue is "poor expenditure management including on national subsidies." There are concerns over the lower autonomy and efficiency in the financial management of local autonomous entities due to the execution of the national subsidy program decided by the central government, a lack of rationality and efficiency in decisions on the execution of certain budget programs as national subsidy programs and the selection of subsidy beneficiaries, etc., and a lack of objectivity and fairness in the application of a standard subsidy rate/differentiated subsidy rate in the national subsidy program.
Last issue is "poor financial management including on financial soundness." While local debt has somewhat decreased recently, the debt of local public corporations has increased by 3.4 times from 2003~2012. The increased debt of local public corporations and entities has not been included in the scope of local finance, leading to lax management as demonstrated by cases in which some programs, supposedly pursued as fiscal programs, were executed as programs by public corporations/entities or private investment businesses.
In response to such problems, improvement plans include: First, while there should be consideration for the benefit principle of public service, a broad source of taxation/low rate taxation, and the expansion of local tax revenue led by local consumption tax and local income tax, which can easily be connected with reinvigoration of the local economy under a challenging financial management environment due to increasing mandatory expenditures, etc. in a forward-looking way, ways to narrow the gap in tax revenue among regions should be pursued, non-tax items/tax-cut ratio should be reduced, and there should be increase of non-tax revenue and improvement of management efficiency to expand independent finances.
Second, reasonable restructuring including systematic improvement of the standard subsidy rate and linearization of the differentiated subsidy rate, etc. is needed for the improvement of efficiency in tax expenditure, and the marginal welfare among areas should become the same through prioritizing the allocation of finances (budget) to areas where welfare can be maximized based on the public demand survey for the reduction of budget waste. Moreover, financial management strategies should be established and executed so that finances' expenditure performance (VFM: value for money) can be maximized for programs in areas/divisions befitting fiscal goals, and overall restructuring between the central government and local governments through the reinforcement of and coordination in mid-term fiscal planning by the central and local governments is needed for improving the productivity of mid-/long-term expenditures or enhancing fiscal performance.
Lastly, to reinforce financial management, local debt and the debt of local public corporations/entities should be managed at an appropriate level, and the efficient issue and follow-up management of local bonds are needed in line with the reinvigoration of the local bond market. Moreover, the annual fiscal balance (flow) and debt balance (stock) should be linked and listed for the improvement of fiscal transparency through the disclosure of fiscal information; the budget and settlement of accounts should be written "together" assuming that they will be compared; and, as budget/settlement items with the same contents in the local finance yearbook are not mutually connected as they are located in different places in lists and scattered, such related items should be integrated through a tree diagram.