Assessing the Effects of Financial Sources on the Fiscal Soundness of Local Government: With a Focus on Special Grants and Non-Tax Revenue

  • Jungsook Kim Korea Research Institute for Local Administration
  • Nara Park Jeju National University, Department of Political Science & Diplomacy
Keywords: special grants, non-tax revenue, fiscal soundness, local government, Korea

Abstract

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.

References

Albornoz, F. & Cabrales, A. (2013) Decentralization, political competition and corruption, Journal of Development Economics, 105(C), pp. 103-111.

Alesina, A. & Rodrick, D. (1994) Distributive politics and economic growth, Quarterly Journal of Economics, 109(2), pp. 465–490.

Alesina, A. & Perotti, R. (1995a) Fiscal expansions and adjustments in OECD countries, Economic Policy, 10(21), pp. 205-248.

Alesina, A. & Perotti, R. (1995b) The political economy of budget deficits, Staff Papers, 42(1), pp. 1-31.

Alesina, A. & Perotti, R. (1996) Fiscal discipline and the budget process, The American Economic Review, 86(2), pp. 401-407.

Baskaran, T. (2010) On the link between fiscal decentralization and public debt in OECD countries, Public Choice, 145(3-4), pp. 351-378.

Berglöf, E. & Roland, G. (1998) Soft budget constraints and banking in transition economies, Journal of Comparative Economics, 26(1), pp. 18-40.

Berne, R. & Schramm, R. (1986) The Financial Analysis of Governments (Englewood Cliffs, NJ: Prentice Hall).

Buchanan, J. M. & Wagner, R. E. (1977) Democracy in Deficit: The Political Legacy of Lord Keynes (New York, NY: Academy Press).

Bunce, V. J. (1980) The succession connection: Policy cycles and political change in the Soviet Union and Eastern Europe, American Political Science Review, 74(4), pp. 966-977.

Cohen, S., Doumpos, M., Neofytou, E. & Zopounidis, C. (2012) Assessing financial distress where bankruptcy is not an option: An alternative approach for local municipalities, European Journal of Operational Research, 218, pp. 270-279.

Dabla-Norris, E. (2006) The challenge of fiscal decentralisation in transition countries, Comparative Economic Studies, 48(1), pp. 100-131.

de Mello, L. (2000) Fiscal decentralization and intergovernmental fiscal relations: A cross-country analysis, World Development, 28(2), pp. 365-380

Dewatripont, M. & Maskin, E. S. (1995) Credit and efficiency in centralized and decentralized economies, The Review of Economic Studies, 62(4), pp. 541-555.

Dewatripont, M., Maskin, E. S. & Roland, G. (2000) Soft budget constraints and transition. Planning, Shortage and Transformation (Cambridge, MA: MIT Press).

Escolano, J., Eyraud, L., Badia, M., Sarnes, J. & Tuladhar, A. (2012) Fiscal performance, institutional design and decentralization in European Union countries. IMF Working Paper, WP/12/45 (Wasington DC: IMF).

Fan, C. S., Chen, L. & Daniel, T. (2009) Political decentralization and corruption: Evidence from around the world, Journal of Public Economics, 93, pp. 14-34.

Fisman, R. & Gatti, R. (2002a) Decentralization and corruption: Evidence across countries, Journal of Public Economics, 83(3), pp. 325-345,

Fisman, R. & Gatti, R. (2002b) Decentralization andcorruption: Evidence from US federal transfer programs, Public Choice, 113, pp. 25-35.

Fornasari, F., Webb, S. & Zou, H. (2000) The macroecnomic impact of decentralized spending and deficits: International evidence, Annals of Economics and Finance, 1(2), pp. 403-433.

Giammarioli, N., Nickel, C., Rother, P. & Vidal, J.-P. (2007) Assessing fiscal soundness: Theory and practice. ECB Occasional Paper No. 56. (Frankfurt: European Central Bank (ECB)).

Grilli, V., Mascoandaro, D. & Tabellini, G. (1991) Political and monetary institutions and public financial policies in the industrial countries, Economic Policy, 13, pp. 341–392.

Groves, S. & Valente, M. (1994) Evaluating financial condition: A handbook for local government (Zürich: ICMA).

Hendrick, R. (2004) Assessing and measuring the fiscal health of local governments: Focus on Chicago suburban municipalities, Urban Affairs Review, 40(1), pp. 78-114.

Heylen, F. & Everaert, G. (2000) Success and failure of fiscal consolidation in the OECD: A multivariate analysis, Public Choice, 105(1-2), pp. 103-124.

Honadle, B. W. (2003) The states' role in U.S. local government fiscal crisis: A theoretical model and results of a national survey, Journal of Public Administration, 26(13), pp. 1431-1472.

Huang, H. & Xie, D. (2008) Fiscal Sustainability and Fiscal Soundness, Annals of Economics & Finance, 9(2), pp. 239-251.

Kemal, M. A., Siddique, O. & Qasim, A. W. (2017) Fiscal Consolidation and Economic Growth: Insights from the Case of Pakistan, The Pakistan Development Review, 56(4), pp. 349-367.

Kennedy, P. (2003) A Guide to Economics (5th edition) (Cambridge, MA: The MIT Press).

Khademian, A. M. (2011) The financial Crisis: A retrospective, Public Administration Review, 71(6), pp. 841-849.

Kickert, W. & Randma-Liiv, T. (2015) Europe Managing the Crisis: The Politics of Fiscal Consolidation (New York, NY: Routledge).

Kim, M., Kho, S. Y. & Kim, D. K. (2017) Hierarchical ordered model for injury severity of pedestrian crashes in South Korea, Journal of safety research, 61, pp. 33-40.

Ko, H. (2014). Empirical analysis of fiscal soundness and public social expenditure: A lesson for the future direction of the Korean welfare state, Asian Social Work and Policy Review, 8(1), pp. 16-33.

Kornai, J. (1979) Resource-constrained versus demand-constrained systems, Econometrica, 47(4), pp. 801-819.

Kornai, J. (1980) Economics of Shortage (Amsterdam: North-Holland).

Kornai, J. (1986) The soft budget constraint, Kyklos, 39(1), pp. 3-30.

Lee, H. & Lee, H. J. (2016) A study on evaluation model for fiscal soundness of local governments. Korea Research Institute for Local Administration Research Paper 559 (Written in Korean)

Lee, S., Grana, R. A. & Glantz, S. A. (2014) Electronic cigarette use among Korean adolescents: a cross-sectional study of market penetration, dual use, and relationship to quit attempts and former smoking, Journal of Adolescent Health, 54(6), pp. 684-690.

Malow, M. (1986) Private sector shrinkage and the growth of industrialized economies, Public Choice, 49, pp. 143–154.

Maskin, E. S. (1996) Theories of the soft budget-constraint, Japan and the World Economy, 8(2), pp. 125-133.

Maskin, E. S. (1999) Recent theoretical work on the soft budget constraint, American Economic Review, 89(2), pp. 421-425.

Maskin, E. S. & Xu, C. (2001) Soft budget constraint theories: From centralization to the market, Economics of Transition, 9(1), pp. 1-27.

McDermott, C. J. & Wescott, R. F. (1996).An empirical analysis of fiscal adjustments, Staff Papers, 43(4), pp. 725-753.

Mitchell, J. (1999) Theories of soft budget constraints and the analysis of banking crises, Economics of Transition, 8(1), pp. 59-100.

Mitchell, J. (2000) Theories of soft budget constraints and the analysis of banking crises, Economics of Transition, 8(1), pp. 59-100.

Mourre, G. & Reut, A. (2019) Non-tax revenue in the European Union: A source of fiscal risk?, International tax and public finance, 26(1), pp. 198-223.

Nordhaus, W. D. (1975) The political business cycle, The Review of Economic Studies, 42(2), pp. 169-190.

Raudla, R., Cepilovs, A., Kuokštis,V. & Kattel, R. (2018) Fiscal policy learning from crisis: Comparative analysis of the baltic countries, Journal of Comparative Policy Analysis: Research and Practice, 20(3), pp. 288-303.

Prud'homme, Remy. (1995). The Dangers of Decentralization, The World Bank Research Observer, 10(2), pp. 201-220.

Roberts, A. (2010) Chapter 3. Treasury power and fiscal rules. The Logic of Discipline: Global Capitalism and the Architecture of Government (New York, NY: Oxford University Press).

Rodden, J. & Wibbels, E. (2010) Fiscal decentralization and the business cycle: An empirical study of seven federations, Economics & Politics, 22(1), pp. 37-67.

Rogoff, K. S. (1987) Equilibrium political budget cycles, American Economic Review, 80(1), pp. 21-36.

Rogoff, K. S. & Sibert, A. (1988) Elections and macroeconomic policy cycles, Review of Economic Studies, 55(1), pp. 1-16.

Roland, G. (2000) Transition and Economics: Politics, Markets, and Firms (Cambridge, MA, London: MIT Press).

Roubini, N. & Sachs, J. (1989) Government spending and budget deficits in the industrial countries, Economic Policy, 8, pp. 99–132.

Jun, S. K. (2002) Local Public Finance (Seoul: Parkyoungsa).

Schaltegger, C. A. & Feld, L. P. (2009) Do large cabinets favor large governments? Evidence on the fiscal commons problem for Swiss cantons, Journal of Public Economics, 93(1), pp. 35-47.

Shijaku, G. (2017) Fiscal sustainability Across the EU and Other Potential Member countries. Working Paper (Tirana: Bank of Albania).

Szymanoski, E. J., Lam, A. & Feather, C. (2017) Financial Sustainability and the Home Equity Conversion Mortgage: Advancing Fiscal Soundness and Affordable Financing for Senior Homeowners, Cityscape, 19(1), pp. 47-72.

Tang, S. Y., Callahan, R. F. & Pisano, M (2014). Using common-pool resource principles to design local government fiscal sustainability, Public Administration Review, 74(6), pp. 791-803.

Von Hagen, J. (2002) Fiscal rules, fiscal institutions, and fiscal performance, Economic and Social Review, 33(3), pp. 263-284.

Von Hagen, J. (2005) Fiscal rules and fiscal performance in the EU and Japan. CEPR Discussion Paper No. 5330 (London: CEPR).

Wolman, H., Strate, J. & Melchior, A. (1996) Does changing mayors matter?, Journal of Politic, 58(1), pp. 201-223.

Wasylenko, M. (2001) Fiscal Decentralization and Economic Development, mimeograph (Syarcuse: Syracuse University, The Maxwell School).

Published
2020-01-26
Section
Article