한국지방행정연구원

This study aims to analyze the impact of Korea's local fiscal adjustment system on fiscal disparities among local governments in South Korea and propose institutional reforms to mitigate regional fiscal disparities. In particular, we discuss how the local fiscal adjustment system can reduce the growing imbalance in population, industry concentration and resources between metropolitan and non-metropolitan areas, and then explore ways to improve the operational effectiveness of the fiscal adjustment system.
The purpose of this study is to empirically analyze whether the general grant, real estate grant, and adjustment grant are operationally effective and contribute to reducing regional fiscal imbalances from 2003 to 2022. It particularly uses both quantitative and qualitative analysis to differentiate with other previous studies. The quantitative research methods include the analysis of 13 inequality indices, static and dynamic fiscal disparities through β and σ convergence analysis, four poverty indices, and spatial autocorrelation analysis to examine the relative levels and spatial characteristics of fiscal disparities. The qualitative research method analyzed the change process of the local fiscal adjustment system from the perspective of historical institutionalism, and supplemented the policy relevance with a survey of public officials' perceptions and expert consultations.
Second, the study seeks to resolve the mismatch between the purpose and the actual function of the local fiscal adjustment system. and to find ways to allocate resources more effectively. The current local fiscal adjustment system focuses on supporting specific regions and balanced development rather than horizontal fiscal rebalancing. Therefore it reviews the allocation structure with a focus on reducing fiscal disparities among regions, and the allocation criteria to meet the original purpose of the system.
Finally, short-term and mid to long-term policy alternatives are proposed in consideration of the practicality. Policy alternatives are needed to be designed to promote the reduction of regional fiscal disparities while maintain the current framework of local fiscal adjustment system. It is also emphasized to be developed in the direction of designing a new local fiscal adjustment system.
The study finds the following key implications. First while the general grant reduces fiscal disparities at the aggregate basis, its impact on the horizontal fiscal balancing effect at per capita revenue basis is limited. This suggests that the general grant is focused on reducing aggregate level of fiscal disparities. On the other hand, adjustment grants and real estate grants are also effective to fiscal balancing effects at per capita revenue basis. It confirms that they can contribute to reducing fiscal imbalances among local government depending on certain criteria.
Second, the analysis shows that the general grant is allocated more to non-metropolitan areas than to metropolitan areas. However, it can be seen as a form of fiscal support for the balanced development. In particular, in recent years, the general grant has modified in direction to practically strengthen regional balanced development and plays a role in providing additional support to local governments with low financial independence. This can be interpreted that the overall balanced development is more emphasized than reducing fiscal disparities among local government.
Third, the general grant has recently provided more financial support to local governmetn with poor financial conditions, which is positive in terms of balanced development. However, this does not fully represent the effect of horizontal equity among local governments, suggesting that the effect may vary depending on the purpose of the system. Therefore, local fiscal adjustment systems need to carefully consider whether to prioritize horizontal fiscal equity or balanced development.
Based on these findings, this study proposes the following reforms to the local fiscal adjustment system. First, the policy goals and functions of the local fiscal adjustment system need to be clarified to set the allocation criteria and strengthen its main functions. For example, it is recommended that the general grant should focus on the function of ensuring local governments' fiscal deficit in the medium to long term, and the real estate Grant should be reoriented to contribute to horizontal fiscal equity. The adjustment grant should be reorganized to focus on reducing fiscal disparities between regions.
Second, individual fiscal adjustment schemes should be simplified to improve the alignment of policy objectives and instruments. Current local fiscal adjustment schemes often fail to fulfill their intended purpose because they incorporate various policy objectives into one scheme. Simplification is necessary for effective policy management, as a “one goal, one means” approach is appropriate according to Tinbergen's Theorem.
Third, to expand support to regions with poor fiscal conditions, the funding pool should be increased and the allocation criteria should be improved. Currently, the size of the general grant, real estate grant and adjustment grant is operated in a zero-sum form, which can make it difficult to reform the system if certain regions are disadvantaged. Therefore, it is necessary to stably expand the size of financial pool and improve rational allocation criteria so that the reform can have a practical effect.
Finally, this study presents short-term and mid to long-term alternatives. In the short term, it is necessary to maintain the current system but improve the allocation method to strengthen the effect of reducing fiscal disparities. In the medium to long term, it is necessary to design a new local fiscal adjustment system that encompasses balanced development and horizontal fiscal equity. In this way, the operational goals and actual functions of the local fiscal adjustment system should be aligned, then both efficiency and equity should be achieved.