Local Government Reform: Is it Effective on Debt Burdens?

Abstract

City and county governments consolidate expecting to improve government efficiency. Expenditures, tax revenues, and local economic development are crucial determinants of government debt burdens. However, little attention has been devoted to the relationship between city-county consolidation and the level of debt burden. This study reviews the literature and explores the relationship between city-county consolidation and debt burdens. It reveals that certain factors, namely the level of public expenditure, economic development, taxes and other revenues, assessed value, and ‘political strength’ have all been assessed as affecting debt burdens. Taking consolidated and non-consolidated local governments in Korea, fixed effects regression analysis was employed to test the hypothesis that city-county consolidation is associated with an increase in the debt burden of local government. The results support the hypothesis of a positive correlation between city-county consolidation and debt burdens.