Analysis of Fiscal Decentralization Policy and Local Transfer Projects

Published on 16 June, 2023
Published by Social Administrative Program Evaluation Division

   Since the establishment of the Fiscal Decentralization Plan (FDP) in 2018, the government has been implementing fiscal decentralization policies and local transfer projects under the goals of enhancing local autonomy, improving accountability, and promoting balanced national development. Fiscal decentralization policies, such as raising the local consumption tax rate, began being implemented in 2019. Starting in 2020, fiscal projects worth KRW 5.8 trillion have been transferreded to local governments in conjunction with the expansion of local taxes. Thus, three to four years have elapsed since the initiation of FDP implementation.
   This report aims to analyze whether the fiscal decentralization policies and local transfer projects have achieved their original goals, such as enhancing local autonomy and accountability and alleviating regional fiscal disparities. It also examines the suitability of projects transferred to local governments and whether they have been effectively managed. The overall objective is to derive improvement measures for future development. The main analysis results are as follows.

1. Fiscal Autonomy
   (1) In terms of local fiscal consolidation, local tax revenues have continued to increase, largely due to higher local consumption taxes. However, the increases have predominantly taken place at the provincial or metropolitan level rather than the municipal level.
   (2) The fiscal independence of local governments is on the decline, with fiscal disparities widening among certain local governments. This trend contradicts the objective of fiscal decentralization—that is, mitigating fiscal disparities among local governments and fostering balanced development.
   (3) As for the enhancement of local autonomy and accountability, a survey conducted among the central and metropolitan governments yielded the following results. On the positive side, increased autonomy in budget formulation/execution and heightened interest from mayors and local councils were highly rated. On the negative side, the issue of budget formulation being heavily dependent on the mayor’s will was reported as significant.

2. Fiscal Accountability
   Efficient budget execution is essential for enhancing fiscal accountability, a fundamental principle of fiscal decentralization. However, municipal governments (cities, counties, and districts), who are tasked with actually implementing local transfer projects, have demonstrated low budget execution rates of 58–59% over the past two years. This underscores the need for local governments to enhance the management of budget execution in the context of local accountability. Similarly, the Ministry of the Interior and Safety needs to consider strengthening the budget execution standards used in evaluations of local transfer projects to the extent that these measures do not conflict with the intent of fiscal decentralization.

3. Suitability of Transfer Projects
   In relation to the suitability of transfer projects, survey respondents from both the central and metropolitan governments generally agreed that most projects were aptly suited to be managed as local affairs. However, some projects in such fields as environment; social welfare; land and regional development; and agriculture, forestry, marine, and fisheries were perceived as being more closely aligned with the central government’s jurisdiction.
   In light of these findings, we conducted an in-depth analysis of the following five categories of local transfer projects: local river/stream-related projects (including local river improvement, small stream maintenance, and ecological waterway restoration), water supply facility expansion and management projects, infertility treatment cost support projects, organic fertilizer support projects, and forest road facility projects.
    Looking forward, the government needs to diligently monitor the budget scale and performance trends of these projects. Should there be a notable deterioration in post-transfer budget and performance, or if issues arise concerning national equity, the government should consider strengthening cooperation between the central and local governments or reassigning related functions.

4. Performance Management of Local Transfer Projects
   Under the current performance management system for local transfer projects, evaluations are primarily focused on budget implementation and settlement by local governments. This narrow focus makes it challenging to assess the effects of local transfer in terms of enhancing local autonomy and accountability. The government is advised to take the following steps insofar as they do not compromise the consistency of the fiscal decentralization policy:
   (1) Transform the current evaluation system, which is focused on budget and settlement implementation, into a comprehensive system that allows for verifying the effects of local transfer on fiscal autonomy and accountability;
   (2) Review the evaluation results of locally transferred responsibilities and take appropriate steps, such as providing support, making improvements, and reallocating related functions based on the findings; and
   (3) Implement a thorough management system to ensure that all performance statistics and data on the locally transferred fiscal projects are properly maintained, as there have often been cases of the central government lacking responsible personnel overseeing the projects since the initiation of local transfer.