Korea’s local governments lose sight of fiscal reality as debt piles up

Korea’s local governments are piling up debt while their spending remains stubbornly detached from fiscal reality as old programs survive, new ones are added and cash handouts grow.

A 200-meter (656-foot) underground bunker in Cheongju, North Chungcheong, was turned into an art exhibition space less than two years ago for 1.3 billion won ($957,300). Now, what hangs at its entrance is not an exhibition notice but a banner announcing a temporary closure.

The venue itself is now under review because controlling humidity and keeping the facility running have proved costly. North Chungcheong is seeking ways to reduce debt and cut spending.

So far, the province has spent 1.08 billion won to operate the facility. Its annual running costs of roughly 500 million won are now being reassessed as the province is due to repay 121.8 billion won in debt next year.

“We now have to spend more than 100 million won a day just on interest,” North Chungcheong Gov. Shin Yong-han said.

The bunker encapsulates a persistent problem in Korea's local finances: Facilities and welfare programs created by one administration remain on the books, even as newly elected officials add projects of their own.

Shin, for his part, has promised a pet theme park and a K-pop concert arena.

The strain is increasingly visible in local government finances.

Local governments nationwide recorded a consolidated fiscal balance ratio of minus 4.93 percent this year, according to the Ministry of Planning and Budget and the Ministry of the Interior and Safety on Wednesday. It marked a fourth straight year in which spending exceeded revenue.

The consolidated fiscal balance measures the difference between actual revenue and spending across local governments' general accounts, special accounts and funds, excluding internal transactions, borrowing and debt repayments.

Debt has risen along with those deficits.

Local government debt climbed by nearly 15 trillion won over five years, from 30.03 trillion won at the end of 2020 to 44.98 trillion won at the end of last year.

At the same time, local governments are becoming less able to finance themselves.

Their average fiscal self-reliance ratio, which measures how much of their budgets they can fund with revenue they raise themselves, fell from 45.34 percent in 2022 to 42.37 percent this year. In 48 of Korea’s 243 local governments, that revenue raises less than 10 percent of the budget.

Yet their budgets keep growing.

Local government budgets total 341.9 trillion won this year, up 35 percent from 253.2 trillion won in 2020. Money transferred from the central government to local governments through the local allocation tax system also grew from 50.3 trillion won to 74 trillion won over the period.

Local government budgets have ballooned even as Korea’s population has declined.

Korea’s population shrank 0.3 percent between 2015 and 2025, while local government budgets jumped 94.3 percent, according to the privately run Fiscal Reform Institute. Per capita budgets rose 99.2 percent among municipal and county governments, which outpaced the 91.8 percent increase among metropolitan and provincial governments.

In one district that recorded the steepest population decline, the number of residents fell 6.2 percent while its budget jumped 121.5 percent. Its per capita budget more than doubled.

The contradiction — ever-larger budgets coupled with constant complaints that there is little money to spare — stems largely from the difficulty of eliminating existing spending.

“Rather than cutting spending introduced by their predecessors, new local leaders simply add projects of their own,” said Sohn Jong-pil, head of the Fiscal Reform Institute. “The programs don’t go away, while tax revenue fails to keep up.”

For public facilities, the spending does not end with construction. Staffing, utilities, repairs and maintenance become permanent expenditures.

Among 344 major cultural, welfare and sports facilities run by 102 local governments, operating losses totaled 674.3 billion won last year. Just 32, or 9.3 percent, made a profit, according to data submitted to the National Assembly last year.

Decisions made by the central government can add another layer of pressure.

When the national government launches or expands a subsidized program, local governments must often foot part of the bill. Their required contributions total 45.13 trillion won in this year’s initial budgets, up 10.4 percent, or 4.25 trillion won, from a year earlier.

The rural basic income program is one example.

The central government plans to increase funding for the program from 304.7 billion won this year to 1.17 trillion won next year and expand its coverage from 17 counties to 35. Because the state fund covers only half the cost, the expansion will increase the financial burden on local governments.

That leaves local officials with less control over how they spend their money.

State-subsidized programs accounted for 57.5 percent of local governments' policy spending last year, up from 49.4 percent in 2017. By contrast, locally initiated programs accounted for 42.5 percent last year, down from 50.6 percent.

North Chungcheong offers a stark example. The province’s general-account budget grew by 430.4 billion won this year compared to last year. But 96.2 percent of that increase went to state-subsidized programs and legally mandated spending.

Local tax revenue has not kept pace.

Based on initial budgets, local tax revenue nationwide rose just 8.7 percent from 108.5 trillion won in 2022 to 118 trillion won this year. Local government budgets grew 18.5 percent over the same period — more than double the rate of tax revenue growth.

Yet tighter finances have not stopped local governments from adding new spending.

Uiryeong County in South Gyeongsang, which raises just 8.3 percent of its budget on its own, paid every resident 500,000 won last month at a total cost of 12.5 billion won.

North Jeolla has decided to pay 1.2 million won a year to each of 723 descendants of people who took part in the Donghak Peasant revolution (1894-95). The province's fiscal self-reliance ratio is 23.52 percent this year, the lowest among Korea's metropolitan cities and provinces.

Fiscal discipline is weakening just as local governments can least afford it.

In May, the government revised the guidelines for preliminary feasibility studies of major public projects. For areas losing population, it reduced the weight given to economic feasibility by 5 percentage points and increased the weight given to balanced regional development by the same amount.

In effect, the change gives greater consideration to whether a community needs a project and less to whether the project makes economic sense.

“Easing feasibility requirements must not weaken scrutiny of whether projects are economically efficient, though balanced regional development should also be taken into account,” Choe Byeong-ho, an economics professor at Pusan National University, said.

A semiconductor-driven surge in tax revenue is unlikely to translate into immediate relief for local governments.

The central government plans to create a so-called future response fund and change the formula for distributing national tax revenue to local governments. Under the new system, local governments will receive 19.24 percent of domestic tax revenue after contributions to the fund are deducted.

That will reduce funding available for local allocation taxes next year by 30.5 trillion won compared to the current formula. The government has allocated 15.3 trillion won from the new fund to local governments, but that money comes with more restrictions on how it can be spent.

Experts say simply finding more revenue will not fix the underlying problem.

“Local governments are not on the verge of bankruptcy, but they do need to go on a fiscal diet,” said Kim Woo-cheol, a professor of taxation at University of Seoul. “One option worth considering is having outside experts with no ties to local interests conduct a thorough review of projects across the board.”

Another expert said local governments should bear greater responsibility for their own fiscal decisions.

“Local governments should be given autonomy, but they also need to bear real responsibility for the decisions they make,” said Park Jhung-soo, a professor of public administration at Ewha Womans University.

BY AHN HYO-SEONG, CHOI JONG-KWON, JANG WON-SEOK [[email protected]]