Significantly Reduced Local Tax Grants... Financially Vulnerable Local Governments on 'Emergency'

Lower Autonomy Means Higher Revenue Dependence, Urgent Issue
Considering Local Bonds Issuance... Efforts to Replenish Treasury Through Public Offering

Due to economic contraction and the government's high-intensity fiscal tightening, frontline local governments are facing an emergency in budget formulation. National tax revenues have decreased by 59.1 trillion won compared to initial expectations, leading to a reduction of 11.6 trillion won in local allocation tax as well.

In particular, the shock from the revenue decline is greater for local governments with relatively low fiscal independence, exacerbating the 'rich get richer, poor get poorer' phenomenon among local governments.

According to southern metropolitan area local governments on the 17th, local governments expect local allocation tax and adjustment grants to decrease by around 16% and 11%, respectively, due to reductions in national and provincial taxes this year.

"Dependence on Local Allocation Tax Exceeds 20%"... The Lower the Fiscal Independence, the Greater the Impact

The local allocation tax is an amount granted by the state to local governments experiencing fiscal deficits. It is a tax system established by the state to adjust disparities in fiscal capacity caused by uneven local tax bases. The larger the gap between the required budget for local government operations and tax revenues, the more allocation tax is provided.

Therefore, reductions in the government's local allocation tax inevitably hit local governments with low fiscal independence harder.

In fact, for Anseong City, which has a fiscal independence ratio of about 25%, the local allocation tax scheduled for this year amounts to 243.6 billion won. This exceeds 20% of the city's tax revenue of 1.1332 trillion won. The allocation tax expected to be reduced due to government cuts is 39.6 billion won, accounting for 3.4% of total tax revenue. Additionally, the 'adjustment grant' from provincial taxes collected by Gyeonggi Province will decrease from 111.5 billion won to 18.3 billion won.

On the other hand, Hwaseong City, with a fiscal independence ratio of 49.5%, does not receive any local allocation tax (excluding special allocation tax). This means it is not affected by the government's adjustment of local allocation tax. Yongin City, which had 50.9 billion won in local allocation tax this year, will see a reduction of only about 8.6 billion won. Yongin City's fiscal independence ratio is around 45%.

A local government official said, "As local allocation tax decreases, local governments with weak industrial bases inevitably face greater difficulties."

New Construction Projects at a Standstill... Local Bond Issuance and Public Offerings as Breakthroughs

Facing reduced revenues, local governments are moving toward high-intensity expenditure restructuring. Although the intensity of tightening varies, local allocation tax and adjustment grants have decreased, and the government has submitted a bill to the National Assembly to cut next year's local allocation tax by 8.5 trillion won.

The top priority for expenditure restructuring is new social overhead capital (SOC) such as roads. A budget team official from a local government said, "It is realistically difficult to cut welfare budgets," adding, "Budgets related to public buildings or roads that have not yet started construction will have to be cut first." A B City official also said, "From the end of this year, unnecessary new construction starts or events will have to be postponed or canceled," and added, "It will not be easy for financially weak local governments to draft next year's budget."

Local governments are also actively exploring local bond issuance. In this regard, the Ministry of the Interior and Safety is reportedly actively considering temporarily increasing the local bond issuance limits for frontline local governments.

To make up for shrinking revenues, local governments are also putting great effort into government or public institution 'public offerings.' Being selected for a public offering project allows them to receive additional support funds separately. A local government official said, "If selected for a government public offering project, we can at least cover part of the insufficient resources," and predicted, "Competition among local governments will inevitably be fierce."

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