[Exclusive] Borrowing and Spending... Local Governments' Disaster Relief Funds Already Reach 4 Trillion Won

'Emergency Disaster Relief Funds from Local Governments'
Gyeonggi-do 1.2933 trillion KRW
Seoul 1.1366 trillion KRW in order
Assemblyman Han Byung-do "Fiscal Balance Must Be Maintained"

[Asia Economy Reporter Jang Sehee] Due to the prolonged COVID-19 pandemic, local governments have reportedly distributed emergency disaster relief funds totaling 4 trillion won to residents this year. It has been found that the insufficient funds were raised by issuing local bonds and drawing from various funds. There are concerns that this could burden not only local fiscal soundness but also the central government’s finances.

According to the "Status of COVID-19 Related Disaster Relief Funds" submitted by the Ministry of the Interior and Safety to Han Byung-do, a member of the Democratic Party of Korea, on the 29th, the total amount of disaster relief funds paid by 17 local governments nationwide reached 3.9337 trillion won. By total payment amount, Gyeonggi Province led with 1.2933 trillion won, followed by Seoul City with 1.1366 trillion won, Daegu City with 281.8 billion won, and Gyeongnam Province with 219.8 billion won.

The prolonged impact of COVID-19 has led local governments to competitively distribute disaster relief funds. Rather than restructuring expenditures, local governments appear to have drawn funds from various sources. While expenditure restructuring for disaster relief payments averaged only 4.7%, the proportion drawn from other funds reached 95.2%. Seoul City paid 1.1366 trillion won in disaster relief funds by drawing 358.3 billion won from the Disaster Management Fund, 443.6 billion won from the Disaster Relief Fund, and 334.7 billion won from other sources. Gyeonggi Province raised only 50 billion won through expenditure restructuring out of a total of 1.2933 trillion won.

As costs such as disaster relief payments have surged, the issuance of local bonds has also sharply increased. As of August 11 this year, the total amount of local bonds issued by 17 local governments was 5.2483 trillion won, approaching last year’s annual issuance amount of 5.4345 trillion won. Since local governments continue to distribute disaster relief funds in the second half of the year, the total issuance of local bonds this year is expected to reach 6 trillion won. Last year’s local bond issuance also increased by 86.7% (2.9112 trillion won) compared to the previous year. Local bond issuance has increased by an average of 80.3% over two years.

In fact, some local governments have confirmed that they covered insufficient funds by issuing local bonds. Seoul City issued 1.8817 trillion won in local bonds this year, some of which was used to pay the "Seoul City Self-Employed Survival Fund." Despite the increase in debt, some places continue to issue local bonds. According to Local Finance 365, Sejong City’s debt ratio rose from 2.58% in 2017 to 3.46% in 2018, but local bond issuance increased by 96.7% instead.

Experts point out that as the balance of local bonds increases, the burden on national debt also grows, so new local bond issuance should be minimized and debt management plans should be established and operated.

Representative Han said, "Despite the worsening local fiscal capacity, efforts to restructure expenditures are insufficient," emphasizing, "Fiscal balance must be achieved through rigorous expenditure restructuring." He added, "New local bonds should be issued only when absolutely necessary and within a range that does not severely damage fiscal soundness." It is also pointed out as a limitation that since local governments operate their finances independently, the central government cannot control expenditure restructuring, etc.

Professor Sung Tae-yoon of Yonsei University’s Department of Economics advised, "It is equivalent to an increase in unmanaged national debt," and said, "Local bonds should be issued only within a manageable range and only when absolutely necessary, not for cash welfare expenditures." Professor Kim Sang-bong of Hansung University’s Department of Economics said, "Ultimately, if bonds are issued locally, residents of the area have to repay them or the central government will have to cover them later," adding, "Especially in local areas, since acquisition tax (a tax imposed on the acquisition of certain assets) is not collected much, indiscriminate issuance is risky."

Meanwhile, as the number of residents struggling due to the resurgence of COVID-19 increases, some local governments have started issuing second-round disaster relief funds. Yeoncheon-gun in Gyeonggi Province is providing 100,000 won per person to all residents as a second disaster relief payment, and Ansan City has decided to pay up to 2 million won in cash to workers in industries facing difficulties.