Does Local Autonomy Enhance the Autonomy in Local Public Finance

Since Korea began political local autonomy in 1995, it has not enhanced fiscal local autonomy. For example, while Korea has increased intergovernmental transfers such as local allocation tax and national subsidies, the share of its own revenues such as local taxes did not rise. There is a particular mechanism that the carry-over includes large amounts of grants-in-aid as one item of non-tax revenue. Even though central government tries to let local governments take efforts to increase the share of their own revenues ex ante, once the local governments increased their expenditure excessively, central government could not but bail out local governments ex post. This mechanism has caused a soft budget constraint problem in Korea. This paper specifies significant factors on the local public finance in Korea by estimating the demand function for local public services.