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Fiscal Irresponsibility

Posted September. 21, 2010 11:21,   


The Seoul city government collected 1.74 trillion won (1.4 billion U.S. dollars) in taxes for real estate acquisition and registration between January and July this year. The figure resulted in a shortfall of 271.3 billion won (234 million dollars), or 13.5 percent, far larger than the city`s target of 2 trillion won (1.7 trillion dollars). The two taxes account for 30 percent of the city`s tax revenues. The Strategy and Finance Ministry projected that provincial and municipal governments nationwide would collect 52.6 trillion won (45 billion dollars) when it set this year`s budget. The target was recently readjusted to 47.9 trillion won (41 billion dollars) due to the sluggish real estate market. Predicting a similar trend, the ministry lowered its target by 5 trillion won each year between 2011 and 2013.

If tax revenue declines, municipal and provincial governments, including Seoul`s, have no choice but to cut not only their budgets, but also subsidies they pay to autonomous city and county offices. If such governments recklessly conduct costly projects, they will be effectively forced into bankruptcy. Bonds issued by municipal and provincial governments jumped 34 percent to hit 25.6 trillion won (22 billion dollars) last year alone. The reason is that the Public Administration and Security Ministry allowed such governments to issue municipal debts above permissible levels to shore up the economy.

In the face of mounting fiscal deficits due to tax revenue shortfalls, the U.S. state of California is even putting up for sale real estate and furniture in its possession. Civil servants have been forced to take unpaid leaves of absence, while prisons have released inmates early to cut costs. Korea has no system for bankruptcy by a municipal or provincial government. So if such governments find their coffers depleted, the central government must take over their debts. Still, the central government cannot afford to give taxpayers` money to municipal and provincial governments that lavishly used budgets to construct buildings and hold festivals at a scale they could not afford.

The Public Administration and Security Ministry needs to devise a program designed to prepare for fiscal crises of municipal and provincial governments. Governments that expect fiscal deficits must aggressively pursue restructuring. They must merge or scale down municipal or provincial corporations that they effectively raced to establish and thus cut ordinary spending. The city of Incheon said a merger between Incheon Urban Railway Headquarters and Incheon Metro will help cut 15 billion won (13 million dollars) in labor costs per year. The ministry must deploy a subsidy program under which it classifies municipal and provincial governments that are aggressive in restructuring and those that drag their feet in such drives to encourage them to compete in cost-cutting efforts.

Councils of municipal and provincial governments should also be blamed. In the southern Seoul suburb of Seongnam, Gyeonggi Province, which declared a debt moratorium due to the construction of a luxurious city hall building, members of the ruling Grand National Party-controlled council expediently passed a budget plan on relocating city hall. This effectively spawned the crisis. Unless such councils, which have given up their due role as watchdogs of municipal and provincial governments and instead blindly endorse them, change their course of action, fiscal crises can hardly be prevented. If wasteful management of fiscal budgets continue, residents will end up paying the price.