Published : 2013-09-27 21:12
Updated : 2013-09-27 21:12
The central government is planning to increase its subsidies to provincial and metropolitan governments by 5 trillion won each year by readjusting national and local taxes. But given local tax cuts, the net increase in revenue will be a mere 1.5 trillion won, which the local governments say will be woefully inadequate to cover increasing welfare costs.
The dispute over subsidies to local governments follows the central government’s decision to scale down its earlier basic pension plan in its 2014 budget request, which will be submitted to the National Assembly by Oct. 2. The local authorities are complaining, with good reason, that the central government is dumping its universal welfare obligations on them.
The local governments maintain that subsidies will have to increase by 7 trillion won, instead of the planned 5 trillion won, if their finances are to be made sustainable. Their estimate cannot be brushed aside as overblown. Instead, it merits serious consideration by the central government and the National Assembly, given that it comes from a study by a think tank, the Korea Institute of Local Finance.
At the core of dispute are the cuts in property acquisition taxes and the provision of free day care for children.
The decline in tax revenue for the local governments is projected to stand at 2.4 trillion won if temporary cuts in acquisition taxes, introduced this year to give the moribund property market a shot in the arm, are to be made permanent as planned by the central government. Tax credits and other benefits for corporations are also projected to add up to another 1.1 trillion won in revenue losses.
The 5 trillion won increase in subsidies minus the 3.5 trillion won in cuts in tax revenues is well below the 1.8 trillion won that the local governments will have to pay to help cover basic pension payments next year. Their contributions would snowball had the central government decided to make good on President Park Geun-hye’s election promise to make all people aged 65 or older covered by the basic pension program.
Much more angering to local governments is the central government’s decision to make a small raise in subsidies for free day care ― from the current 20 percent of the cost to 30 percent for Seoul’s metropolitan government and from the current 50 percent to 60 percent for the other local governments. The increases are 10 percentage points lower than that demanded by the local governments.
Free dare care for all children under 5 was an election promise Park and her opposition rival made during the run-up to the presidential election last December. In November, a bill authorizing 20-percentage-point increases cleared the Health and Welfare Committee of the National Assembly under bipartisan agreement. But the bill has since been put on hold in the face of opposition from the central government.
The local governments are now demanding that the central government withdraw its opposition and endorse the bill’s passage. Few would claim their demand is entirely misplaced. The rival parties are urged to renew the legislation process, in which the central government may choose to make its voice heard through the ruling party.