Research Report
Legislative measures to improve the subsidy system subject to ｢Subsidy Management Act｣ for local governments
Ⅰ. Backgrounds and Purposes
▶ The government is pushing for fiscal decentralization along with political decentralization, and the reorganization of the local financial adjustment system is currently being discussed as a major feature of the second phase of fiscal decentralization. Although the subsidy system subject to ｢Subsidy Management Act｣ was one of the representative local financial adjustment systems, it has not been discussed much in relation to local finance adjustment system. Local subsidy LOCAL SUBSIDY ACT §2.1
are known to perform the main functions of local financial adjustment in Korea. This project examine the relationship between the subsidy system and local finance and find ways to improve the subsidy system for local finance.
Ⅱ. Major Content
▶ Korea's local financial adjustment system functions by stages
○ Local financial adjustment includes the allocation of national and local taxes in the first place
○ After national and local taxes are allocated, local grant taxes and Grants-in-Aid for Adjustment LOCAL FINANCE ACT §29, §29-2
are distributed, which is a financial adjustment system mainly aimed at adjusting the financial power gap among local governments.
○ Subsidy is a financial adjustment system with the main purpose of securing the minimum level of administrative services and the efficient supply of value goods, whereas local grants and adjustment grants are for the purpose of adjusting the financial power gap which is in principle, it is delivered by a fixed rate(basic subsidy rate) SUBSIDY MANAGEMENT ACT §9(1)
subsidy method for each project.
▶ Problems arising from the actual status of state subsidies
○ Only 20% of the total number of projects are subject to basic subsidy rate.
○ Delegated office expenses are also delivered by subsidy allocation method.
▶ Empirical analysis
○ It is difficult to find any indication that the operation of the subsidy system will change the financial power of the local government. It also shows that subsidy does not directly affect the any financial indicators.
○ This is because the operation of the national subsidy system itself does not cover insufficient financial resources of local governments or is not the main purpose of adjusting the financial gap.
○ However, if the ratio of national expenses decreases in relation to the operation of the subsidy system, it may increase the burden of local expenses and local debt, so compliance with the standard subsidy rate is required as much as possible.
▶ This project would like to propose a reform plan according to assumption that the subsidy system is maintained by the current fixed rate subsidy
▶ Since the local grant tax system in charge of fiscal equity cannot play a sufficient role, the subsidy system is performing supplementary function by applying differential subsidy rates despite its original purpose.
▶ Therefore, it should be prioritized to allocate the total amount of transferred funds to function by examining whether individual financial adjustments are being operated for their original purposes.
▶ After that, it is possible to discuss how to operate subsidy system not to infringe local governments' financial autonomy.
▶ In conclusion, we propose the introduction of gross regulation method of financial regulation as a way to prevent abuse of discretionary differential- subsidy rates and indiscriminate compilation of subsidies without application.