KLRI : KOREA LEGISLATION RESEARCH INSTITUTE

Ⅰ. Backgrounds and Purposes

▶ Necessity of Decentralization and Fiscal Decentralization 

○Decentralization means the rational distribution of authority and responsibilities between the central and local governments. In countries where most of the authority for public functions are centralized, as in the Republic of Korea, the transfer of authority from the central government to local governments is a main issue in discussing decentralization. 

○ Decentralizing national authority enables local governments to make more autonomous administrative decisions in line with their unique local conditions within the discretion granted to them, while empowering local residents to participate in the policy-making and implementation processes of local governments in a broader sense. 

○ Decentralization has been one of the key policy goals in Korean since its democratization. Under the current administration, diverse legislative and policy efforts have also been made to expand the administrative and fiscal authority of local governments, laying the foundation for decentralization, including enacting the Act for Amending 46 Acts, including the Price Stabilization Act, for Blanket Transfer of Centralized Administrative Authority and Functions to Local Governments, expanding local consumption taxes, and so forth.

▶ Limited Local Finance and Importance of Grant Scheme 

○ In order for local governments to successfully carry out their duties, adequate financial capacity must be ensured, but currently, the distribution ratio of tax revenues between the central government and local governments stands at 8:2, making local governments highly dependent on the national finance.

○ Furthermore, there are significant gaps in the levels of fiscal independence among local governments, which can result in imbalances in public administration services to the general public. 

○ To solve problems arising therefrom, Korea is operating the local fiscal equalization scheme, including the national subsidies, local subsidies, City/Do subsidies, adjustment grants, coexistent local development fund, special account for the balanced national development, etc. Among them, being transferred to local governments without any specifically designated purpose, local subsidies and adjustment grants are particularly important in expanding independent financial resources of local governments. Since they are allocated by taking into account the financial capacity of individual local governments, local subsidies and adjustment grants also play a role of narrowing down financial capacity gaps among local governments.  

 

Ⅱ. Major Content 

▶ Guarantee of Autonomous Administration under the Constitution 

○ The administrative autonomy of local governments is prescribed in Article 117 of the Constitution of the Republic of Korea (“Constitution”), which guarantees the existence, institutions, and subjective legal status of local governments.

○ The institutional guarantee conferred on local governments implies that local governments have full authority over local administrative affairs, and must perform local administrative duties under their own responsibility. The fiscal autonomy of local governments is derived from these principles, emphasizing the need to guarantee adequate financial resources for their handling of local public functions. 

▶ Concept of Local Fiscal Sustainability

○ While the concept of fiscal sustainability is not clearly defined in the current statutes or regulations, it is a term generally used to refer to the status of fiscal operation, in particular, in relation to expenditures, putting a focus on issues related to ensuring and controlling fiscal efficiency. 

○  However, the concept of fiscal sustainabilitiy of local governments is not limited to the efficiency and control of fiscal management, but should include the securing of financial resources necessary to successfully handle public  functions placed under the jurisdiction of local governments by the Constitution and laws.

○ In particular, considering the nature of the local autonomy guaranteed by the Constitution, the fiscal sustainability of any local government should be evaluated, first and primarily, by reviewing whether the local government has sufficient financial resources to perform its public functions on its own.

▶ Purpose and Types of Grants 

○ According to the statutes and regulations pertaining to the grant scheme, the scheme mainly aims to expand local governments’ financial resources and to reduce financial capacity gaps among the local governments. 

○ Under the current grant scheme, local subsidies, grants-in-aid for adjustment among Cities/Guns, grants-in-aid for adjustment among autonomous Gus, etc. are provided. Detailed matters concerning the grants-in-aid for adjustment among Cities/Guns are prescribed in the Local Subsidy Act; grants-in-aid for adjustment among autonomous Gus are governed by the Local Finance Act and further concretized by municipal ordinances.  

○ Local subsidies are classified into general subsidies, real estate subsidies, fire-fighting safety subsidies, and special subsidies. General subsidies are determined and granted to local governments by comparing the standard amount of financial revenues and the standard amount of financial demands. In calculating the standard amount of financial demands or financial revenues, local governments’ efforts such as local tax collection performance and cost savings are reviewed and reflected.  

○ Real estate subsidies are granted in consideration of various conditions facing local governments, including their financial status, social welfare, education, and real estate tax revenues. Fire-fighting safety subsidies are provided for purposes related to fire-fighting activities and safety. Finally, special subsidies are granted to respond to an expected hike in financial demands that has not been reflected in calculating the amount of general subsidies and to assist nationally promoted programs.    

○ The grants-in-aid for adjustment among Cities/Guns and grants-in-aid for adjustment among autonomous Gus are divided into general adjustment grants and special adjustment grants. General adjustment grants are similar to general subsidies among the local subsidies while special adjustment grants share some common characteristics with special subsidies. 

▶ Problems of and Improvement Plan for Current Grant Scheme

○ Given the lack of connections among the individual types of local subsidies, their types need to be further simplified. In order to attain the essential purpose of the local subsidy regime, general subsidies need to be granted solely on the basis of the financial demands and financial revenues of individual local governments. If it is intended to induce more efficient financial management of a local government by evaluating its own efforts, 

 etc. in determining the amount of general subsidies, Article 1 of the Local Subsidy Act will have to be amended first.  

○ The real estate subsidies which are determined and granted on the basis of local financial conditions and other criteria need to be consolidated into general subsidies or transferred to local taxes. Similarly, it is more appropriate to consolidate the fire-fighting safety subsidies into general subsidies or have them transferred to local taxes, given that the fire-fighting safety subsidies have a specific purpose and thus are unfit to serve the purpose of local subsidies. In the case of special subsidies, the discretion of the granting authority needs to be reduced to a minimum necessary extent, limiting their purpose to handling special financial demands arising from disasters, etc.

○ In light of the nature of the Constitution regulating the basic order of the State, the fiscal order between the central government and local governments should be regulated through the Constitution. However, the Constitution should prescribe only general and abstract matters, not specific details, defining the purposes, principles, etc. of the local fiscal equalization scheme, so that the legislature can develop the scheme into a concrete form based upon such purposes and principles.  

○ The German fiscal equalization scheme is comprised of four stages, with each stage's fiscal adjustment aiming to supplement the fiscal adjustment results of the preceding stage. In Korea, the distribution of tax revenues can be made in stages as well. For example, a system consisting of the following three stages can be conceived: Stage 1 for the distribution of tax revenues among the central and local governments; Stage 2 for local subsidies; and Stage 3 for national subsidies. In such cases, legislation that governs the general principles and procedures of the overall fiscal equalization scheme, such as Germany’s Fiscal Equalization Act and Fiscal Equalization Standards Act, may be considered for enactment.

 

Ⅲ. Expected Effects

○ Presenting major legal issues for research on fiscal equalization scheme, grant scheme, etc.

○ Providing the latest data on Japan’s local allocation taxes and Germany’s fiscal equalization scheme.   

○ Proposing policy directions on issues related to fiscal decentralization and local fiscal sustainability.

○ Providing reference materials in amending statutes or regulations pertaining to the grant scheme.