It was a matter of time for municipal governments across the country to reach the limit of their financial capacity to pay for their share of the costs needed to implement increased welfare programs.
Heads of 226 small cities, counties and wards said in a press release last week that they would declare default on welfare spending unless the central government expanded support for them in carrying out its welfare policies.
Their unprecedented move came as no surprise.
Under the current system, the welfare budget is supposed to be shared between the central administration and municipalities, with the burden ratio varying for specific entitlements. Therefore, measures by central government policymakers and lawmakers to introduce new welfare programs automatically lead to an increase in expenditures by local governments.
Some municipalities already came close to default last year as they struggled to pay for increased child care allowance. The amount shouldered by local administrations increased by nearly 30 percent from a year earlier to 3.6 trillion won ($35.5 billion) in 2013. This year, their payment for supporting child care is set to further rise by 254.2 billion won.
What especially prompted mayors and county heads to warn of a possible default on welfare spending was the implementation of the basic pension scheme for the elderly in July. This measure obliged local governments to pay an additional 1.8 trillion won this year. Their burden will continue to grow in the coming years as the number of old-aged pensioners is expected to rise at a steep pace.
Municipal administration heads called on the central government to expand its share of the costs for basic pension and child care benefits and increase the rate of the local consumption tax from the current 11 percent to 16 percent.
The Finance Ministry has reacted negatively to their demands, saying it is difficult to provide additional financial support for local governments. Some ministry officials have emphasized the need for strengthened efforts by local administrations to work out solutions on their own by reducing spending on unnecessary projects.
True, some municipalities have been criticized for squandering money on constructing luxurious office buildings and hosting show-off events. But it is more correct to say saved budgets would fall far short of covering the sharp increase in welfare payouts.
The budget allotted by local administrations for financing welfare programs this year rose by 12.6 percent from 2013, more than double the 5.2 percent increase in their total expenditures. The average financial self-reliance ratio of municipal governments slid from 51.1 percent last year to 50.3 percent this year, further reducing the room for their contribution toward expanded welfare schemes.
These conditions may result in degrading other public services offered to residents, especially in municipalities with a lower fiscal capacity but more recipients of benefits.
It is necessary to change the current process of making decisions on welfare policies, from which local governments have been excluded. Central government officials and lawmakers should be obliged to have prior consultations with municipal administrations on the proper and sustainable ways of sharing the burden. Local governments should also be allowed to provide residents with welfare services tailored to meet their specific needs.
In the long run, active consideration needs to be given to expanding welfare funds by raising local tax rates or creating a new tax designed to strengthen the social safety net. At the same time, policies resulting in excessive burden beyond fiscal capability should be readjusted or repealed to prevent the collapse of the financial foundation of local autonomy.