Toward the Soundness of Local Finance to Cope with Fiscal Crisis in Local Governments

Abstract

This study analyses the causes of recent fiscal crisis syndrome in local governments. Whether fiscal crisis is temporary or permanent is diagnosed in terms of theoretical models.<BR> Major causes of fiscal crisis in local governments are tax cut policy by central government, and decrease and aging of population in local areas. The gap between revenue and expenditure of local governments will gradually expand over time, causing fiscal pressure to fiscal crisis.<BR> Several policy options are suggested to enhance the soundness of local finance. First, the share of local taxes should be increased in the total revenue of local governments. Tax reform, such as the introduction of local income tax, should be pursued. Second, the fiscal accountability of central government should be enlarged to cope with the increasing demand of social welfare. Third, local debt should be managed well under the management system of local finance. Four, the control and participation of the residents in local area should be enlarged with taxpayers’ suits and participatory budgeting system.