"Fiscal Capacity Indicators Used for Fiscal Support Should Be Based on Final Accounts as Well"

Most Fiscal Capacity Indicators Based on Original Budget
Significant Gap Between Final Accounts and Original Budget
National Assembly Budget Office: "Structural Improvements Needed for Fiscal Capacity Indicators"

There have been criticisms that the indicators used to assess the fiscal capacity of local governments are based on the original budget rather than the final accounts, leading to reduced accuracy. Since these indicators are used by the central government when providing fiscal support to local regions, there are calls for improvements to better reflect the actual conditions of local governments.

On November 5, the National Assembly Budget Office released a report titled "Limitations and Improvement Tasks of Local Government Fiscal Capacity Indicators," stating, "Fiscal independence and fiscal autonomy are core indicators for evaluating the structure and autonomy of local finances, but since they are calculated based on the original budget, there is a gap compared to actual fiscal indicators based on final accounts." The fiscal independence indicator is used for designating areas with declining populations, while the fiscal autonomy indicator is used as a standard for allocating fire safety grants, among other things.

The issue is that in recent years, errors in tax revenue forecasts have grown, resulting in original budgets being set lower than the final accounts. When fiscal capacity indicators are calculated based on the original budget, discrepancies with the indicators based on final accounts are inevitable. From 2019 to 2023, the error rate in tax revenue forecasts over the past five years ranged from 23.7% to 37.4%. Last year, the fiscal independence of basic local governments nationwide, when measured based on final accounts, was 1.9 to 4.8 percentage points higher than when measured by the original budget. The fiscal autonomy indicator was also 1.9 to 2.7 percentage points higher based on final accounts compared to the original budget.

The accuracy of fiscal capacity indicators is important because these indicators are used as the basis for the central government's fiscal support to local governments. The central government provides grants and subsidies to regions with low fiscal capacity indicators in order to reduce fiscal disparities among regions and ensure the provision of minimum administrative services. In particular, as the government has announced plans to pilot a local preference principle in key fiscal projects in next year's budget to address the risk of local extinction, it is even more necessary to accurately assess the fiscal conditions of local governments.

The National Assembly Budget Office stated, "To enhance the actual autonomy of local finances and the reliability of these indicators, structural improvements to the fiscal capacity indicators are necessary," adding, "To reduce the gap between the original budget and final accounts, it is necessary to introduce a parallel indicator based on final accounts to improve the reliability of fiscal analysis indicators."

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