60% of local government project spending tied to national subsidy programs

About 60 percent of project spending by local governments goes toward nationally subsidized programs, a new report shows. An expanding structure that requires local governments to co-fund centrally designated projects has steadily squeezed the share of initiatives that localities pursue on their own. Critics say the growth in national subsidy programs has not translated into greater real autonomy for local finances.

National subsidy projects accounted for 169.1 trillion won — 59.2 percent — of total local government project spending of 285.6 trillion won ($211 billion) this year, according to the National Assembly Budget Office's "2026 Local Government Finance of Korea" report released Tuesday. Locally initiated projects made up 116.4 trillion won, or 40.8 percent. Project spending is calculated by subtracting administrative operating costs and financial activities from total local government expenditure budgets.

In 2018, locally initiated projects held a slight majority at 50.6 percent, with national subsidy projects at 49.4 percent. National subsidy projects overtook locally initiated ones in 2019, and the gap has widened since, reaching 18.4 percentage points this year. Compared with last year, the share of national subsidy projects rose 1.7 percentage points from 57.5 percent to 59.2 percent, while the share of locally initiated projects fell by the same margin.

In absolute terms, national subsidy project spending nearly doubled from 86 trillion won in 2018 to 169.1 trillion won this year. Locally initiated project spending also grew — from 88.2 trillion won to 116.4 trillion won — but the increase amounted to only 28.2 trillion won. Even within this year alone, national subsidy projects grew by 12.8 trillion won from last year, while locally initiated projects grew by just 1 trillion won.

The expansion of national subsidy programs also weighs on local governments' own budgets, since receiving central government funds typically requires localities to contribute matching local funds. The matching local funds for national subsidy programs this year totaled 44.9 trillion won, according to a separate tally by the budget office. The more local governments channel into national subsidy programs, the less they have available to allocate to their own initiatives.

The burden is particularly pronounced in the welfare sector. Social welfare subsidies accounted for 53.9 percent of all national subsidies this year. The budget office said a significant portion of welfare-related national subsidy programs involve legally mandated expenditures under statutes and regulations. As demographic shifts drive up demand for welfare services, local governments may find themselves with fewer resources to invest in local economic development or improvements to living conditions.

When the scope is broadened beyond project spending to total expenditure budgets — including administrative operating costs and financial activities — the share of locally initiated projects shrinks further. Locally initiated projects accounted for 34.1 percent of total expenditure budgets this year, down 7.8 percentage points from 41.9 percent in 2018. Among local government types, autonomous districts recorded the lowest share at 16.4 percent, followed by provinces at 28.1 percent, counties at 29.0 percent and cities at 31.4 percent.

The integrated fiscal self-reliance rate — a measure of local governments' ability to fund themselves — also fell. The national average stood at 47.4 percent this year, down 1.3 percentage points from last year. By type of local government, special and metropolitan cities averaged 55.6 percent, while counties averaged just 13.7 percent. The national average has dropped 3.9 percentage points over seven years, from 51.3 percent in 2019.

The rise in national subsidy programs alone does not necessarily mean all local governments have lost an equivalent degree of spending discretion, however. Some national subsidy programs take the form of competitive grants or block grants that localities apply for voluntarily. The budget office said it is necessary to examine the degree of local discretion and fiscal flexibility separately by program type.

The budget office proposed increasing the central government's share of funding for social security programs that must be provided at a uniform national standard, while adjusting funding arrangements for programs where local demand varies — aligning those more closely with local governments' roles. "The scale of funds transferred to local governments, as well as how much discretion localities have over how those funds are spent, should both serve as benchmarks for evaluating fiscal decentralization," the office said.