The Korea Local Administration Review

The paper explores the local fiscal crisis by tracing the trends of local debtsand fiscal dependency of local governments to the central government andproposes the causes of the recent local fiscal crisis. The fundamental causes ofthe crisis are immanent in local fiscal system with soft budget constraint oflocal governments, local taxes not to work as a price of local public goods, andintergovernmental grants to persue excessive equalization. The crisis ismagnified recently as the central government imposes the financial burdens ofits expansionary fiscal policy against the worldwide economic recession and ofits progressive social welfare policies on the local governments. We analyzeempirically the effects of fiscal variables such as the ratio of social welfareexpenditures to total expenditures, the degree of fiscal autonomy, etc. on localdebts or local deficits by using tobit estimation. The main result is that thedeterminants of local fiscal crisis are mostly different in the types of localgovernments or the measuring methods of the crisis.
□ Keywords: local fiscal crisis, soft budget constraint, social welfare expenditures,tobit model