Assessing the Effects of Financial Sources on the Fiscal Soundness of Local Government: With a Focus on Special Grants and Non-Tax Revenue
The fiscal soundness of local governments has been of great interest to both scholars and practitioners. This study explored how special grants and non-tax revenue affected the financial stability of Korean local governments in the five-year period between 2009 and 2013. Panel regression found that special grants reduced fiscal soundness, which was measured as the debt ratio and financial independence of the local governments in this study. In addition, as the non-tax revenue in absolute terms increased, financial independence initially decreased before rising again at a certain point in time. We also classified local governments into three groups (low, medium, high) in terms of their debt ratios and financial independence. Special grants and non-tax revenue had a significant yet differential influence on the fiscal soundness of local governments depending on the level of financial independence, while general grants did not have statistically significant effects on local governments with either low debt ratio or low financial independence.
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