[News Terms] Korea's Fiscal Decentralization at OECD Mid-Level

'Fiscal decentralization' refers to the transfer of financial authority and responsibility, including decision-making rights related to taxation and expenditure held by the central government, to local governments. The transfer of authority from the central government to local governments is called 'local decentralization,' and a key requirement for the successful realization of local decentralization is fiscal decentralization.

For local governments to actively manage regional finances, they must be able to independently secure and use a certain budget. To achieve this, there must be an appropriate balance between 'revenue decentralization,' which is the authority for local governments to autonomously secure revenue sources, and 'expenditure decentralization,' which is the authority for local governments to autonomously spend taxes.

However, in Korea, the financial gap between local governments is large, and the dependence on the central government for finances is high, resulting in a wide gap between revenue decentralization and expenditure decentralization. According to the report "International Comparison of Fiscal Decentralization Levels in OECD Countries (2021)" by the Korea Local Tax Research Institute on the 10th, as of 2021, the proportion of local taxes to total taxes (national taxes + local taxes) in Korea was 24.7%.

Korea's share of local taxes is somewhat higher than the OECD average (19.7%) but lower than the average of federal countries to which major countries belong (32.5%). In particular, it is significantly lower compared to major federal countries such as Canada (55.1%), Germany (53.7%), and the United States (46.5%).

The higher the proportion of local taxes compared to national taxes, and the smaller the gap between revenue decentralization and expenditure decentralization, the better fiscal decentralization is considered to be achieved. During the Moon Jae-in administration, Korea pursued fiscal decentralization as a national agenda and aimed to improve the share of local taxes to 40%.

Korea's revenue decentralization ratio was 18.5%, similar to the OECD average, but expenditure decentralization was 44.2%, significantly exceeding the OECD average. Korea's revenue decentralization ratio is lower than that of federal countries such as the United States and Germany, as well as the unitary state of Japan (30.5%).

On the other hand, Korea's expenditure decentralization was higher than Japan (42.8%), the United States (40.6%), and Germany (40.5%), ranking seventh highest among OECD countries. The report suggested that since the authority over basic tax rates and exemptions for local taxes is concentrated in the central government, it is necessary to enhance the practical taxation autonomy of local governments.