Fiscal decentralization in Korea

Abstract

PurposeThe purpose of this paper is to make policy recommendations for the current fiscal decentralization discussion by examining the operating mechanisms of local taxes, unconditional grants, and conditional grants within the fiscal relationships between the national government and local governments in Korea.Design/methodology/approachAfter examining the current fiscal relationships between the national government and the local governments, this paper analyzes trends of local taxes, unconditional grants from both national and high-level local governments, and conditional grants from both national and high-level (or provincial level) local governments between 2002 and 2015. Local governments are classified into high-level local governments, and three types of low-level local governments are: si, kun, and ku.FindingsSince the structure of local government finances in Korea is very complicatedly intertwined, the present decentralization discussion regarding increasing the share of local tax revenues may not achieve its purpose of fiscal decentralization. The authorities in charge of revenue allocation should be first decentralized at high-level local governments; high-level local governments should then arrange unconditional and conditional grants from high-level local governments to low-level local governments while taking into consideration unconditional and conditional grants from the national government to low-level governments.Originality/valueThe dichotomy between the central government and local municipalities has been utilized in the existing discussion regarding fiscal decentralization in Korea, but this study highlights the important resource allocation roles of high-level local governments.