Basic Report

In Korea, the share of social welfare expenditures to local governments' budgetshas been rapidly increasing since 2002, due to national demographic changes andfiscal policy orientation transitions from economic development to social welfare. Thehigh growth rate of social welfare expenditure is influencing the revenue andspending structures of local governments in various ways, which face highly rigidbudget constraints.Therefore, we analyze a number of local fiscal data from various sources tocharacterize local fiscal structures, which are influenced by rapid increases in socialwelfare expenditures.First, we measure the degree of fiscal pressure occurred from rapid increase insocial welfare spending with two standardized indices: the percentage change in socialwelfare during 2002-2010 and the share of social welfare in 2010. We analyze localgovernments by four groups, according to the degree of fiscal pressure, to find thedifferences across the groups in "how local spending structure has been adjusted" and"how local revenue structure has been changed in response to the increase of socialwelfare spending".Second, we examine the national specific grant programs and show the new trendin social welfare spendings of local governments.Third, we investigate fiscal conflicts between central and local governments withthe case of aid program for infants and children.Based on various empirical analyses, we suggest policy options for rebuildingintergovernmental fiscal relations in each governmental level.First, in order to deal with the rapid increase in social welfare expenditure, thecentral government should raise the ratio of tax burden to GDP by increasing incometax revenue, and utilize fiscal savings in education expenditure as social welfarefinancial source, provided from the decreased number of schooling students.Second, the national specific grants should be revised in the directions of raisingstandard rates of subsidies, and narrowing the gap of standard rates between Seouland other local governments. The differential standard rates that are applied only inthe social welfare sector are suggested to be improved with narrowed width of thoserates and reflecting characteristics of governmental types.Third, since the general grants are not provided to self-governing districts, whichare experiencing the most fiscal pressure due to increased social welfare spendings,the general shared tax scheme should be revised to correct the financial problem inself-governing districts. Also, the allocation method of general grants among localgovernments is recommended to reflect changes in social welfare needs anddemographic structures.