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Country Report on Local Finance
in Korea
Korea Domestic Economic Situation and Government’s Effort
May, 2015
• South Korea’s economic growth rate has fallen behind the
G20 average for the fourth straight year
• Korea’s gross domestic product grew by 3.3 percent in 2014, lower
than the G20 average of 3.4 percent
• OECD data showed South Korea came in 14th among the 34
OECD member countries in terms of average annual wages
based on purchasing power parity
• According to the Taxing Wages report by the OECD, the average wage of a
Korean worker in a one-person household in 2014, after applying purchasing
power parity, was $46,664
• The OECD average was $40,770
• This figure is lower than that of Japan (No. 13, $46,884) but higher
than that of Sweden (No. 15, $46,379)
• Korea ranked 7th in its corporate debt to GDP ratio
among 15 member countries of the OECD
• Without including pension debt, Korea’s corporate debt
to GDP ratio in 2014 was 105 percent
• Japan’s corporate debt to GDP was 101 percent, slightly
lower than Korea’s
• Korea topped in ODA growth
• South Korea lagged behind major rich countries in the
volume of official development assistance given to
developing countries to help their social and economic
infrastructure.
• But the nation topped OECD donators in its ODA growth
Local Finance Situation
• Local Expenditure Fast Growing, But Weaken Fiscal Power of
LG in Korea
• In terms of Final Consolidate Budget Size of LG recorded
• 157 W1Tr(=$1 Bn), 13.6% of GDP in 2009
• 177 W1Tr, 12.4% of GDP in 2014
• Overall Local Finance in volume is growing fast, but LG’s
independent financial and fiscal power is relative decreased
• It started 63.5% in 1995 and now registers 44.8% in 2014,
showing the big gap of 18.7%
Main Causes
• Aging Society leads to increasing social welfare costs and
medical treatment
• Central government’s social welfare functions were heavily
transferred to LG
• In 2005, to compensate Government introduced
Decentralization Tax which is permanently fixed to 0.94% of
Internal Tax Income
• Central government’s subsidy programs is fast growing from
less than 500 programs in 2005 to 956 in 2014, supported by
matching fund
• Public Awareness on Security and Safety contributes to
increase Disaster reduction budget in LG
• Since global fiscal crisis, LG’s tax bases are weakened
Recent Efforts to Change in Local Finance
• Performance-based budgeting in LG (2016)
• Newly reframed Program Budget System
• Accrual Accounting System (2007)
• Financial Program Performance Evaluation
• Budget-costing System for measuring exactly daily
operational administrative costs and assets depreciation,
etc.
Some Keys to Solution
• Local Taxation Reform
• Establish National Finance Committee on
Transfers to Subnational Governments
• Fiscal decentralization Result Evaluation System
• Adopt a real equalization Fund System for
Balanced Regional Development