The Volume of Local Government Budget

[Figure II-1] shows the proportion of combined public finance taken up by the central government, local governments, and autonomous educational authorities. The Figure includes expenditures by each group, net of fiscal interactions between the central government and local governments for the period 1980 to 2013. Data prior to the introduction of local autonomy are also included for comparative purposes. Fiscal interactions include local subsidies and subsidies from the national treasury that the central government provides to local governments, and local education grants and subsidies distributed by the central government to local educational authorities.

Education grants accounted for 19.4% of the total public finance that combines the finances of the central and local governments in 1980. This rose to 19.7% in 1981, before decreasing to 15.5% in 1982, remaining at around 15%, with a margin of ±%p, until 2013 when it reached 16%.

Two major changes that had an impact on the size of local education grants occurred in 1982. One was the introduction of an education tax, and the other was the reinstating of legal rates for grants. The Local Education Grant Act was established in 1971, with 12.98% of national tax revenue earmarked for the local education budget, starting in 1972. However, the legal rates ceased to have effect after the 8.3 measure taken on August 3, 1972,⁴⁾ and the amount

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of the local education budget was determined within the government budget.

At the end of 1981, the government decided to introduce an education tax in order to raise funds for local education, and began to levy the tax in 1982.

In April 1982, the Local Education Grant Act was revised to reinstate legal rates for grants. At that time, legal rates for general grants were around 11.8%

of internal tax revenue, which was similar to the rates that were effective before the legal rates for grants became invalid. Special grants were not subject to legal rates and, instead, were allocated within the national budget. In reality, however, no special grant has been provided since 1983. Surprisingly, the local education budget as a ratio of the total national budget decreased, in spite of the critical legal changes, including imposing the education tax and reinstating the legal rates for grants, both of which were intended to ensure a stable source of funding for local education. Thus, the increases in the sources of revenue and the actual size of revenue did not match. The majority of the local education budget comes from local education grants and education tax revenue.

4) ‘Government’ that is mentioned without the level of government such as ‘central government’ or ‘local government’ refers to the central government in this study.

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[Figure II-1] Each level government final expenditures as percentages of total expenditure

(Unit: %)

the central

government local

governments local education authorities

Source: Ministry of Strategy and Planning, Appendix to Budget Overview, Ministry of the Interior, Yearbook of Local Public Finance for each year

While the ratio of the local education budget to the national budget remained much the same, the ratio of the local government budget to the national budget increased consistently from 1980, and that of the central government budget continued to decrease. The central government budget made up over 50% of the national budget in the early 1980s, but fell to around 40% in the late 1980s and then to below 40% in the early 1990s. This trend continued until after 1995.

The central government budget ratio rose back above 40% only during the period of the financial crisis(1998~2001), and remained at 35% to 40% beyond 2001.

Then, in 2010, when the economy was again hit by a crisis, the ratio of the local government budget declined, while that of the central government increased.

More major institutional changes that affected the size of local government finance took place in the process of designing and formulating the local autonomy system than after the system was implemented. Specifically, the local subsidy and legal rates for local education grants, which had practically ceased to have an effect after the 8.3 measure of 1972, were restored. Furthermore, local tax

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revenue increased with the introduction of a tobacco consumption tax and other measures in the late 1980s. In the early 1990s, an aggregate land tax and local grant were introduced.

In 2013, the budget was allocated among the central government, local governments, and autonomous educational authorities in the ratio of 39:45:16.

Compared with the ratio of 40:44:16 in 1995, after local autonomy was introduced, there is little change in how the budget was allocated among the three groups. The ratio stood at 51:33:16 in 1985. The portion national budget allocated to the central government shrank significantly, while the share of local governments grew from 1985 to 1995. In 1980, the budget was distributed among the three groups in the ratio of 53:28:19.

The budget of local governments, including educational authorities, represented around 9% of GDP in the 1980s. This figure rose to around 11%

in the 1990s and steadily increased to approximately 12% in 1996. The upward trend continued. It climbed up to 14.8% in 2003 and remained between 13.5%

and 14.5% in the years that followed, reaching 14.4% in 2013. In summary, the budget of local governments as a percentage of GDP decreased from 1980 to 1988, then reversed, and continued increasing until early 2000s. The figure has remained much the same during the past 10 years (see <Appendix II-1>).

The changes to the ratios of the central government, local government, and educational authorities to the national budget are shown in [Figure II-1]. The changes to the shares of local governments' expenditures as a percentage of GDP are shown in <Appendix II-1>. We can draw the following conclusions from these figures.

First, local public finance as a percentage of the national budget increased at a fast rate, even though local public expenditure as a percentage of GDP exhibited a downward trend throughout the 1980s. During the same period, the government budget generally remained on a declining trend, but local public finance as a percentage of GDP contracted at a slower rate than in the case of the central government's finance because more funds were transferred from the central government to local governments.

Second, there was no significant change in the budget allocation between the central government, local governments, and educational authorities after local autonomy was adopted, but local public expenditure as a percentage of GDP

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continued to expand. Thus, the expanded local expenditure during this period is attributed more to the increase in the overall national expenditure than to the changing flows of funds from the central government to local governments.

The changes in local public finance, including the revised local subsidy rates, in the same period only altered the ratio of the budget allocation between the central government and local governments.