Push for 7%P Local Consumption Tax Rate... Weak Monitoring System for Local Government Spending

Democratic Party to Finalize 'Local Fiscal Adjustment Plan' by End of Month
Central Government Debt Rapidly Increasing... Local Government Net Debt Drops Sharply

[Asia Economy Reporter Jang Sehee] As the Democratic Party of Korea is pushing to raise the local consumption tax rate, currently at 21%, by 7 percentage points to promote fiscal decentralization of local governments, there are calls for stricter management and supervision.

According to the government and ruling party on the 11th, the Democratic Party plans to come up with detailed measures for local fiscal decentralization by the end of this month. This is expected to include raising the local consumption tax rate from 21% to 28% and adjusting the ratio of national tax to local tax to 7 to 3. It is also expected to include raising the local allocation tax rate from 19.24% to at least 19.91%. The local consumption tax refers to using a certain percentage of the value-added tax, which is currently a national tax, as a resource for local governments.

If fiscal transfers to local governments increase, the financial independence of local governments will improve. On the other hand, the central government's fiscal capacity will decrease. According to the Ministry of Economy and Finance, the central government's debt increased from KRW 627.4 trillion in 2017 to KRW 651.8 trillion in 2018 and KRW 699 trillion in 2019. In contrast, the net debt of local governments (local governments and local education authorities) decreased from KRW 32.8 trillion in 2017 to KRW 24.2 trillion in 2019.

An official from the Ministry of Economy and Finance said, "While local decentralization is progressing and the financial conditions of local governments are improving, the central government's debt is rapidly increasing," adding, "The fiscal burden may increase further in the process of implementing policies such as social safety nets and job creation." In fact, with the presidential election next year, a political event that makes tax revenue expansion difficult, if only the local consumption tax rate is raised, the central government's burden could increase.

However, a bigger problem is that the mechanism to monitor local governments' spending remains unchanged. The local consumption tax, established in 2010, is currently evaluated only for 'conversion project compensation' where national projects are transferred to local governments. The Ministry of the Interior and Safety supervises the planning and execution of projects once a year. Other parts, such as acquisition tax compensation, remain in a blind spot of management and supervision. A government official said, "Since national subsidies are budgets transferred by the state, strong evaluation and recovery measures can be taken," but added, "However, since the local consumption tax goes to local government resources, it is practically impossible to provide more or less incentives."

Regarding this, Professor Hong Woo-hyung of Hansung University’s Department of Economics said, "If it is counted as a local tax base, the scope of flexible use expands," but added, "However, if it is an independent resource, it is practically impossible to evaluate each project." Professor Park Jung-soo of Ewha Womans University’s Department of Public Administration also said, "Using the local consumption tax for fiscal decentralization is only formal and it is difficult to say that local autonomy has actually increased," emphasizing, "If the local consumption tax rate is raised, it is difficult to guarantee post-evaluation or performance, so institutional supplementation is necessary."

This content was produced with the assistance of AI translation services.