Passing on Public Debt to the People

The moratorium declaration by the mayor of Seongnam, Gyeonggi Province, is a stark reminder of a municipal or provincial government’s ability to trigger a fiscal crisis. Such governments recorded a combined surplus of two trillion won (1.6 billion U.S. dollars) in 2008 but suffered a loss of seven trillion won (5.8 billion dollars) last year. This is because tax revenues declined while spending on economic stimulus and welfare increased. The National Assembly Budget Office warned in a report that lack of improvement in both expenditures and revenues will further aggravate the situation.

The newly elected heads of municipal and provincial government who took office this month, however, are poised to push ahead with their populist election pledges while ignoring budget shortfalls. To keep the pledges made by 32 upper-level municipal and provincial government heads and school superintendants, more than 230 trillion won (192 billion dollars) will be required. Their tax revenues are 4.7 trillion won (3.9 billion dollars), however, less than the combined payroll for their workers of 5.5 trillion won (4.6 billion dollars). The outstanding balance of municipal and provincial government bonds began soaring in 2008 and was 25 trillion won (21 billion dollars) last year. The debts of companies run by municipal and provincial governments, which have begun rapidly increasing, are an estimated 50 trillion won (41.6 billion dollars). Reckless pursuit of election pledges without considering fiscal conditions will lead to bankruptcy. City and provincial councils need to keep their leaders in check.

The U.S. has a bankruptcy system for municipal and state governments and Japan is implementing fiscal consolidation measures for fiscally troubled municipal and prefectural governments. Korea has no such system, however. The central government pays 40 percent of the budgets for municipal and provincial governments. If this is insufficient, shared taxes are provided. The principal responsibility for sound and efficient fiscal management lies with municipal and provincial governments, but the central government is also partially responsible. An effective system is needed for Seoul to prevent a fiscal crisis instead of assessing and evaluating fiscal conditions of smaller governments after problems arise.

The Public Administration and Security Ministry did nothing until municipal and provincial governments almost completed construction of luxury offices. The ministry belatedly acted by questioning the energy efficiency of the new buildings and urging remodeling after revising regulations. The Strategy and Finance Ministry says it will examine the debts of municipal and provincial governments. A fiscal crisis is inevitable if populist projects to win votes are idly passed and the central government makes belated responses to fiscal problems in municipal and provincial governments.

In Korea, state-owned companies and municipal and provincial governments are the most likely to suffer from financial difficulty. Excessive intervention by the central government is undesirable but a potential fiscal crisis should not be overlooked. If municipal and provincial governments have heavy debts and insufficient tax revenues, the central government must issue warnings to them, help them resolve the problems, or resort to direct intervention. Municipal and provincial leaders must also refrain from passing on public debts to the people for the sake of populist politics.