Country Report on Local Finance in Korea Korea Domestic Economic Situation and Government’s Effort

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 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 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% Local Finance Situation

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

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. Recent Efforts to Change in Local Finance

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