Basic Report

As the burden of social expenditure accompanying the declining birthrate and aging population and slowing of local revenue growth become a reality, concerns over the local government fiscal sustainability are rising. In this research, we forecast the discretionary budget of local governments from the viewpoint that such domestic and external environmental change can act as a risk factor. In this paper, we define the available resources as a financial resource that local governments can mobilize discretionally. We define the available finance sources as the remainder after deducting obligation expenditure from total revenue. Obligation expenditure includes expenses that are extremely rigid enough to be de facto duty expenditure. Also, to reflect the reality of local finances, the scope of laws and ordinances includes autonomous regulations including ordinances.The long-term city/state taxes are forecasted by using the Gross Regional Domestic Product (GRDP) as an explanatory variable. City, county, and ward local tax revenues, non-tax income, and adjustment grants were estimated in conjunction with long-term forecasts of city and local tax revenues. Local grants and state subsidies forecasts are estimated by utilized the long-term forecast of the National Assembly Budget Office. The obligation expenditure are estimated under the assumption that the average value of the proportion of revenues in the last three years will continue in the future.Our medium to long term forecast shows that by the 2030s, the available resources to the municipality will be depleted. In particular, the available resources for autonomous districts will decreased sharply after the mid-2020s, and fiscal conditions will deteriorate. When considering the population changes, the available resources will decreased even more rapidly. We tried to evaluate the fiscal sustainability of local governments. When evaluating the local government’s capacities for the mandated social welfare programs, counties’ current capabilities are at a very high level. But it will decrease sharply over time and eventually will experience budget deficit after latter half of the 2030s. Most vulnerable municipalities to the environmental changes are autonomous districts, and it seems that they can not perform the duty of mandatory welfare program from the mid-2020s.City/state’s capacities for available resource are also very insufficient, and when the scheduled basic pension increases and regular job switching of irregular workers are enforced, their capacities will be even more damaged. Our analysis suggests that policy changes for strong expenditure control and revenue expansion are required immediately.In this paper, we compare the available resources capacity for reduction of national subsidies and expansion of local tax. Among the various policy combinations, the expansion of local taxes is advantageous in terms of short-term effects, and reductions in national subsidies are better with long-term effects. Therefore, priority can be given to the reduction of national subsidies that can be implemented immediately within the local government rather than the expansion of local taxes that take a considerable amount of time to create institutional and policy environments, and the effect has been proved in the long term. Reduction of government subsidies is not only necessary for efficient allocation of financial resources from the viewpoint of national finance but also as a means to maintain the sustainability of local finance.