Basic Report

This study analyzes the fiscal effects of the general subsidy on financial support for special local autonomous governments. Based on a new proposal applying 10 percent of contributions from local governments to supplementary fiscal demand, this study investigates the impact of the present proposal for financial support on the number of grants, financial conservation(financial guarantee function), and fiscal equalization(financial adjustment function) under the regional cooperation between metropolitan governments(e.g., Busan-Ulsan-Gyeongnam Mega City) and primary local governments(e.g., Jirisan Mt. Development Association). The authors also examine other viable alternatives of financial support for a regional self-governing body, such as the Puan-Ulsan-Gyeongnam case by conducting scenario analyses. The alternatives are divided into measures using the current general subsidy and the other options. The results of this study are as follows.
  
   First, the measure which provides financial support using the general subsidy is implemented based on a regional self-governing body that results in intergovernmental financial transfer from primary local governments to metropolitan governments. Given the limited total amount of the general subsidy, the formation of the special local autonomous government by the metropolitan governments, Puan-Ulsan-Gyeongnam, is more likely to decrease the amount of the general subsidy that would be used as financial support for primary local governments in the areas of Pusan, Ulsan, and South Gyeongsang Province. Also, the measure for the special local autonomous government was not statistically significant in improving the financial guarantee function measured by the relative poverty index and so on. In addition, it does not significantly increase the general subsidy of the special local autonomous governments for metropolitan governments (Puan-Ulsan-Gyeongnam) and primary local governments (Jirisan Mt. region and abandoned mine area in Ganwon-Do province). When assuming that 1) the expenses for the first step of the projects for the special local governments in the Puan-Ulsan-Gyeongnam metropolitan area are 200 billion Won, 2) the metropolitan governments would pay a portion of the expenses (30-50%) by one-third of each other, and 3) 10 percent of the paid expenses would be recognized as supplementary fiscal demand, the allocated general subsidy to the metropolitan governments would range between 3.1 billion won (1 billion won each) to 5.9 billion won (2 billion won each) according to the analysis. There are different views on the appropriateness of the general subsidy allocated to the metropolitan governments for performing the special purpose of the special local autonomous government. There is a need to review the amount (1 billion won – 2 billion won) allocated to the special local autonomous government and its adequacy to perform the large-scale and special-purpose projects from the perspectives of the economy of scale or cost saving.
   Second, as the other option to support activities to achieve the objectives of special local autonomous governments, this study analyzes the constructed scenarios by using the local allocation tax that include 1) adjustment of the inclusion ratio of the standard financial revenue, 2) raising the legal rate of domestic tax, and 3) allocation of special revenue sharing.
   The results show that the adjustment of the ratio of basic revenue and amended revenue presents opposite results in the first scenario related to the inclusion ratio of the standard financial revenue. When the inclusion ratio of the standard financial revenue increases from 80 percent (present standard) to 90 percent, the allocated general subsidy increases by 1.981 trillion won for the primary local governments and decreases with the same amount for the metropolitan governments. On the other hand, a change to 70 percent of the inclusion ratio leads to an increase of 2.51 trillion won for the metropolitan governments.
   Next, if the inclusion ratio of the amended revenue is adjusted from 80 percent (present basic standard) to 70 percent, the general subsidy that metropolitan governments receive decreases by 265 billion won, while the amount for the primary local governments increases. Based on the Gini coefficient, the inequality gap between local governments reduces to a minimum by adjusting the inclusion ratio of the amended revenue to 70 percent when the scope of the inclusion ratio is limited between 70 percent and 90 percent. Therefore, in this case, to support special local autonomous governments, policymakers should consider adjusting the inclusion ratio of the amended revenue and securing budgets for the governments. The adjustment of the overall inclusion ratio of the amended revenues and establishment of a separate account to support special local autonomous governments with consideration of their own tasks performed can be an alternative because the reconstruction of the ratio related to basic revenue could have a great ripple effect.
   In the case of the second option, i.e., changing the legal rate of domestic tax, this study examines the amount of secured budgetary resources of special local autonomous governments when the legal rate changes from the current rate (19.24%) to 25%. When changing the legal rate of domestic tax, the following three ways can be considered which includes: 1) allocating increased resources by the legal rate change to the special local governments by that increased amount, 2) using the current allocation method after increasing the overall general subsidy, and 3) following the current proposal (applying 10 percent of contributions from local governments to supplementary fiscal demand). This study presents the budget changes by regional groups and the degree of local subsidy allocated by the alternatives when it was distributed according to the standard ratio in 2022. It is because the legal rate changes can be an easy way to secure financial support for special local autonomous governments while minimizing the influence on the other local governments.
   In addition, the scenario includes the analysis of the alternative to using special revenue sharing to provide financial support to special local autonomous governments, such as the adjustment of the ratio between general subsidy and special revenue sharing from 97:3 to 95:5. The central government could secure additional 700 billion won for special local autonomous governments by a 1 percent increase of special revenue sharing. This could ensure a better fit for establishing special local governments and supporting them.
   Finally, this study explores different ways of supporting special local autonomous governments, besides using the general subsidy. It is not limited to financial support for special local governments but considers recommending a broad framework to secure budgets and minimize the inter-regional impact. Another alternative to achieve the purpose is to adjust the entire local taxes and allocate them, where primary local governments receive general subsidy while metropolitan governments are excluded from the general grants. To this end, two issues need to be addressed: 1) how to allocate and distribute local taxes to 17 local governments, concentrated on Seoul and Gyeonggi-do Province, and 2) whether or not such allocated general subsidy can cover the changes of adjustment grants. However, this study only focused on empirically examining the changed amount of the general subsidy regarding the issues discussed. Therefore, it needs further studies to find more precise analysis results. In 2022, the total local consumption tax was 19 trillion won, while the calculated general subsidy is 53 trillion won when the local consumption tax is excluded from the basic revenue. The central government may need to consider a feasible alternative that provides financial support to independently operate special local governments through autonomous decisions to use the financial resources between metropolitan governments and primary local governments. The introduction of such an alternative using the general subsidy allocation may decrease the general subsidy in terms of allocation by the legal ratio because the existing allocation results are 16 trillion won for metropolitan governments and 39 trillion won for primary local governments.