Fiscal prudence is not just demanded of the central government. The need to maintain fiscal soundness also applies to metropolitan, provincial and municipal governments. Local debt is no less serious than national debt, on which public attention has been mainly focused until recently.
But some of the local governments are found to be so overleveraged that their spending needs to be reined in by the central government. In this regard, few would dispute a decision by the Ministry of Public Administration and Security to punish those who fail to meet its criteria.
The ministry says it will start looking into the books of local governments next Wednesday and that, based on its month-long inquiry, it will decide which local governments will be placed on a workout program. The main criterion, it says, will be a 40 percent debt-to-revenue ratio. Others include the debt levels of corporations owned by local governments.
It is shocking to learn that Incheon, the third most populous city in the nation, is among the potential candidates for a workout program. Its debt-to-revenue ratio, which is claimed to be at 38.7 percent, may be revised upward.
Should the Incheon metropolitan government be placed on a workout program, restrictions would be placed on its issuance of bonds and investments in new projects. It could be also ordered to cut its payroll as part of a restructuring program. In other words, it would be deprived of much of its autonomy in allocating its resources.
In addition to the Incheon metropolitan government, several municipalities are candidates for a workout program. Among them is Taebaek City, whose tourism corporation has 160 billion won in liabilities. Pay for its employees has been withheld for the two consecutive months.
Those candidates for a workout program are not the only ones whose finances are on shaky ground. Eighty-seven percent of the local governments rely on subsidies for more than half of their spending. One in 10 does so for more than 90 percent of its outlay.
Primarily held accountable for overleveraging are metropolitan and municipal mayors, who have had no qualms about launching big-ticket projects without taking into due consideration the fiscal capacity of their local governments. Part of the responsibility is shared by councilmen who have failed to put profligate mayors in check. Some councils are denounced for paying greater attention to the welfare of their members than the fiscal prudence of their municipalities.
Another problem is the virtual assurance that the central government, with national taxes accounting for 80 percent of all tax revenues in the nation, will make up for deficits incurred by local governments. Claiming that huge subsidies from the central government create moral hazard for local governments, experts say it is necessary to increase the portion of local taxes substantially if metropolitan mayors, provincial governors and municipal heads are to be made more careful about spending.
Unlike Incheon, Taebaek and some other municipalities, Seoul has a low level of debt. Its debt-to-revenue ratio stands below the 15 percent level. But this fiscal soundness can hardly be said to be impregnable, as evidenced by a rapid increase in the capital city’s debt.
Na Kyung-won, the conservative ruling Grand National Party’s candidate for the Oct. 26 mayoral by-election, acknowledges the potential debt problem when she promises a substantial cut in the city’s outstanding debt of 19.6 trillion won.
Recalling that the debt increased by 7.8 trillion won from 2006 to 2010, she promises to cut it by almost 4 trillion won by 2014. To attain that goal, she says she would scrap or delay some of the planned projects and reorganize SH Corp., the city’s homebuilder, whose debt accounts for 80 percent of the city’s total debt.
Park Won-soon, the mayoral candidate representing the oppositionist liberal groups, is well advised to make a similar commitment. The capital’s debt would snowball if he should make good on his pledge to promote general welfare, as opposed to selective welfare for the needy, without scrapping some big-ticket projects. It would cost a huge amount of money to provide free school lunches, jobs for people on low incomes and subsidies for families, to name only a few.
