Gyeonggi Province Cites Centralized Fiscal Structure for Financial Crisis

Gyeonggi Province, South Korea, is experiencing a severe fiscal crisis that a special task force attributes not merely to budget mismanagement or temporary revenue shortfalls, but to a "deformed" and overly centralized fiscal structure dominated by the national government. The provincial government's Fiscal Innovation Task Force (TF) presented its findings and a roadmap for fiscal decentralization, highlighting deep-seated systemic issues.

The immediate cause of the fiscal distress is a significant drop in revenue from real estate acquisition taxes, which fell by more than 3 trillion won from 11 trillion won in 2022 to around 8 trillion won recently. This volatility, coupled with an expansion of ongoing projects based on fluctuating tax revenues, has led to structural deficits during economic downturns. However, the TF argues that the central government's fiscal adjustment mechanisms are working against Gyeonggi Province.

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The national government's 'shifting of responsibility' has accumulated, such as transferring about 90% of personnel and equipment costs for firefighting to local general accounts even after firefighting became a national responsibility.

According to the TF, the calculation of general grants does not adequately reflect the fiscal demands of large metropolitan areas like Gyeonggi, which have high populations and significant needs for child care and regional transportation. This results in Gyeonggi receiving less funding compared to cities like Seoul for essential expenses such as infant care. Furthermore, the province claims it receives approximately 750 billion won less in national funding annually due to a roughly 5% lower national fund support ratio for its provincial headquarters compared to other large provinces.

The burden of transfer grants from the provincial headquarters to its 31 constituent cities and counties also exacerbates the problem. In 2024, this burden stood at 37.0%, significantly exceeding the national average of 24.8% for provinces. This high ratio depletes the provincial headquarters' available funds, which could otherwise be allocated to critical areas like regional transportation and industrial infrastructure. The TF proposes reforms including automatic savings of excess revenue into stabilization funds and a mandatory five-year review of net provincial and city/county contributions for national grant projects. They also call for central government reforms, such as creating a new category for "super-large metropolitan provinces" in general grant calculations and capping the provincial headquarters' share of transfer grants at 35%.

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The burden ratio of adjustment grants paid by the provincial headquarters to the 31 cities and counties exceeds the national average of 24.8% as of 2024, reaching 37.0%.