Financial Decentralization – the Essence of Local Autonomy

The 41st Seminar on local autonomy was co-hosted by Friedrich Naumann Foundation for Freedom and Center for Local Autonomy in Seoul, on last Thursday, April 07. Under the title of “Major Issues in Local Finance and Future Prospect”, the seminar aimed to raise public awareness on the growing local debt and encourage discussions among academia and field experts on ways to improve local financial situation by empowering local governments in their right to local taxation and promote financial decentralization.

The seminar started with the keynote speech by Mr. Walter Klitz, Resident Representative of FNF. Mr. Klitz pointed out the worrisome fact that the snowballing local debt wasn’t included in the calculation of the total national debt, which has been misleadingly downplaying the scale and significance of national debt of Korea. Then, he stressed the urgent need to objectively and systematically assess the debt situation by including all state controlled enterprises and institutions on national and local level including also the debt of the social funds, according to the 2001 guidelines of the International Monetary Fund.

The keynote speech was followed by the first speaker, Prof. Son, Hee Jun from Choengju University, who proposed that revenue resources between central government and local government should be re-allocated in a way to promote financial decentralization. Pointing out that any reform or institutional improvement aiming to promote local autonomy and decentralization have been yet made, he criticized that the current grant and subsidy system of central government for local government has actually deepened the local dependency on the central. Currently, the proportion between national tax and local tax in national budget is 80% to 20% and it needs to be gradually changed to 70% to 30% and ultimately 60% to 40%.

Also, Prof. Bae In-Myung from Seoul Women’s University shared the idea that the decentralization subsidy system introduced in 2005 has actually worsened local finance due to the increasing financial burden of local government in terms of social welfare. He claimed that it would be desirable to clarify the nature of social services offered by local governments, to re-categorize them in order to ultimately impose different financial burden on local governments accordingly. He also said that a block subsidy would be more helpful than a specific subsidy in order to promote local financial autonomy and strengthen decentralization.

Lastly, Prof. Kwon, Young-ju from Seoul City University compared Japan and Korea in terms of the right of local government to taxation and tried to draw policy implications on how Korean local governments could secure their autonomous right to taxation. For instance, a lesson could be drawn out of the fact the revenue from local tax takes only 11.4% out of total national budget and the revenue gained from local tax out of total local budget only takes 25.5% in Korea, compared to Japanese counterparts, respectively 26.3% and 44.7%. It needs to scale up the revenue from local tax, while reducing the resources transferred from the central to local government.

Active discussions followed the presentations. Among other inspiring ideas was a claim that legitimacy and feasibility of financial decentralization depends on whether we could gain a public consensus on it and without any political power supporting the idea, we won’t be likely to witness any further progress in financial decentralization.

The seminar was attended by more than eighty people, who were mostly local counsellors, researchers and students.