Basic Report

Korean Local Governments spend a quarter of their budget into social welfare area in FY 2014. The need of local match-funding for central social welfare policy is expected to increase rapidly in the stagnant local revenue. In addition, new policies starting from the latter half of 2014, such as Basic Pension, Disability Pension, National Basic Livelihood Institution, Levy Plan in Social Welfare, etc. are enforcing further fiscal burden to local governments. This study forecasts local demand of social welfare and local supply(local revenue) for measuring the sustainability of local finance. Also this study tries to suggest the direction of fiscal transfer for central government and the direction of financial management for local governments.There are four revenue expansion plans for Korean local governments. First of all, resetting social welfare expenditure share between local government and central government is required. Until now, local social welfare policies from central government were unfunded mandates or underfunded mandates. That is why many local governments undergo lack of funds to deal with local social welfare policies. Local governments own revenue should be expanded and more financial aids through local finance mediation system are needed.Second, increasing local consumption tax rate and introducing local welfare tax should be considered. If local consumption tax rate would be increased 1%, local governments can get additional 475 billion won on the basis of 2015. Local welfare tax should be introduced as an object tax from various tax resources.Third, local shared tax rate and ratio of National subsidy should be increased. Gradual increasing of local shared tax rate is needed to deal with various local social welfare policies. National subsidy rate for lowbirth and aging and National subsidy rate for guaranteeing the people's basic human rights need to be increased fo follow purpose.Lastly, local governments’endeavor to increase their own revenue sources is essential. Local governments can cover a considerable portion of welfare resources by themselves. Raising local tax collection rate, finding additional local tax resources and increasing fees are examples. Moreover, local governments can get additional local welfare resources from readjusting expenditure structure. Financial Program Assessment Rating Tool would be helpful to restructure local expenditure.