Basic Report

This study has two primary research objectives. First, this work builds alternative indicators for measuring the level of fiscal decentralization in South Korea. Second, using alternative indicators, we evaluate the level of fiscal decentralization and propose future fiscal decentralization policies. To this end, this study conducted analysis following procedures. The first procedure involves redefining the concept of fiscal decentralization. Through a theoretical examination of the concept of fiscal decentralization and a comprehensive review of fiscal decentralization elements in context of South Korea, key factors were identified. These were then synthesized to redefine the concept of fiscal decentralization in a manner suitable for the objectives of this study. The second procedure includes an analysis of prior research on fiscal decentralization indicators and the proposal of alternative indicators. After comprehensively reviewing domestic and international empirical studies and policy utilization indicators to identify the strengths and limitations of existing indicators, alternative indicators were proposed. The final procedure is to evaluate the level of fiscal decentralization of local governments based on the proposed indicators.
   The key findings are as follows: First, on the revenue side, both regional local governments and municipal governments exhibited a similar decreasing trend in overall revenue decentralization levels from 2011 to 2021. Notably, there has been a significant decline in revenue decentralization levels for both regional local and municipal governments, especially since 2013. Despite institutional reforms, such as raising the local consumption tax rate and changing the method of imposing local income tax, the actual revenue decentralization showed a downward trend. In addition, when regional local governments were classified into detailed types, the level of revenue decentralization in special cities and provinces was high. In the case of provinces, there were disparities in revenue decentralization levels among provinces, particularly noting a very low level in certain areas, such as provincial regions. When municipal governments were classified into city, county, and district types, the level of local decentralization in terms of revenue for districts and cities was similarly high. However, in county areas, the revenue decentralization levels were lower compared to cities and districts, and significant disparities were found. Second, when evaluating the level of fiscal decentralization on the expenditure side, there were not significant differences in the decentralization levels between governments units (regional local and municipal), government types (city, county, district), and characteristics of the same type (population). In other words, when categorizing regional local governments into special cities and provinces, metropolitan cities, Gyeonggi-do(province), and other types, substantial differences in the proportion of internal project costs were not identified. Likewise, in the case of local governments, there were no significant differences in the proportion of internal project expenses regardless of type. However, when compared to the revenue decentralization levels, significant differences were found in the revenue-expenditure gap, especially in county areas. In terms of revenue decentralization, cities and districts showed similar level, but the level of decentralization for county areas was exceptionally low. cities and districts showed similar level, but the level of decentralization for county areas was exceptionally low. On the other hand, there are no significant differences in expenditure decentralization between cities, counties, and districts, and the expenditure decentralization level in county areas was found to be higher than that in districts.
   Based on these results, policy implications for promoting fiscal decentralization are as follows. In terms of revenue decentralization, discussions on fiscal decentralization policies should focus on resources that can effectively contribute to local finances. Specifically, there is a need to reduce non-local financial resources and reinforce revenue expansion policies that are available for local government. In terms of expenditure decentralization, institutional reforms are required to expand the amount of funds that local governments can autonomously mange and promote investment of these funds in various local projects. Policies to increase local governments’ expenditure autonomy by transferring projects from the central government to local governments are continuously being promoted, but more efforts are needed to achieve tangible results. Therefore, future strategies must be developed to strengthen the level of expenditure decentralization of local governments.