I. Local Finance under the Constitution of the Third Republic (1962 to 1971)
1. Overview
A more modern local finance regulatory system came into being in the era of the Third Republic, starting with the enactment of the Local Finance Act (LFA, Law No. 1443) on November 11, 1963, and continuing with the creation of the Enforcement Ordinance (Presidential Decree No. 1605) for the LFA on January 15, 1964, and the implementation of the Financial Accounting Regulations on January 19, 1964, which provided detailed guidelines for the implementation of the Enforcement Ordinance.
(1) Supervision of Local Finance
The Local Government Act (LGA) and the LFA in the Third Republic, as in the previous Republics, continued to require local councils’ input in determining local fiscal policies and measures. However, despite the requirement in the Constitution for the creation of local councils subject to a separate statute, the Third Republic refused to legislate such a statute. As a result, the central government maintained and strengthened its control over local governments via the local government heads it appointed.
Article 62 of the LFA of 1963 required the Secretary of Interior to decide the basic principles and rules by which local government organizations were to prepare their budgets. Moreover, cities and counties intent on installing municipal safes were required to seek the approval of governors in advance. Busan and the provinces were likewise required to seek the approval of the Secretary of Interior and the Prime Minister, according to Article 41 of the LFA.
Article 103, moreover, obligated local government heads to appoint central government employees to their respective local governments to oversee tasks related to the revenue and spending of the given governments. Article 70 of the amended LFA of 1966 authorized the central government to appoint central government employees to accounting positions in local government organizations, subject to the consent of the heads of those governments, thus reinforcing the central government’s direct control over local fiscal policies.
(2) Revenue Structure
The amendment of the Local Tax Act (LTA) in the 1960s introduced a series of new measures regarding local finance, including the abolition of surtaxes on value-added taxes on national taxes as well as tax refunds, and the replacement of the Local Government Allocation Tax Act (LGATA) by the Local Subsidy Act (LSA). Local governments during the 1960s mainly drew upon local taxes, non-tax revenue, local subsidies, and central government subsidies for their budgets. Non-tax revenue included such items as income on properties, usage fees, service charges, balances carried over from previous fiscal periods, donations, transfers from other accounts, income generated in the preceding fiscal period, local government bonds, and other miscellaneous sources.
Local subsidies, on average, made up 31.1 percent of municipal revenue, which was greater than the amount provided by local taxes (28.1 percent). Counties, on the contrary, relied on local taxes for 48.5 percent of their revenue, and on local subsidies for only 28.3 percent. Counties collected greater income in local taxes than their urban counterparts thanks to the relatively high proportion of farmland taxes.
Overall, local finance in the 1960s accounted for only 30 percent or so of entire national finance, which was far less than the 110 percent of Japan (KRILA, 1998, 404).
[Table 4-5] Changes in Local Revenue: 1962 to 1970
(Units: KRW 100 million and percentage)
| Year |
Total revenue |
Local taxes |
Percentage (%) |
Non-tax revenue |
Percentage (%) |
Local subsidies |
Percentage (%) |
Central subsidies |
Percentage (%) |
| 1962 |
118 |
52 |
44.1 |
22 |
18.6 |
15 |
12.7 |
29 |
24.6 |
| 1963 |
160 |
74 |
46.3 |
27 |
16.9 |
21 |
13.1 |
38 |
23.7 |
| 1964 |
180 |
88 |
48.9 |
35 |
19.4 |
22 |
12.2 |
35 |
19.5 |
| 1965 |
233 |
114 |
48.9 |
38 |
16.3 |
28 |
12.0 |
53 |
22.8 |
| 1966 |
347 |
162 |
46.7 |
52 |
15.0 |
83 |
23.9 |
50 |
14.4 |
| 1967 |
464 |
141 |
30.4 |
72 |
15.5 |
156 |
33.6 |
95 |
20.5 |
| 1968 |
663 |
194 |
29.3 |
100 |
15.1 |
251 |
37.8 |
118 |
17.8 |
| 1969 |
1,027 |
266 |
25.9 |
229 |
22.3 |
369 |
35.9 |
163 |
15.9 |
| 1970 |
1,261 |
332 |
26.3 |
213 |
16.9 |
503 |
39.9 |
213 |
16.9 |
Source: KRILA, 1998, 403 and 118
[Table 4-6] Comparison of National and Local Finances: 1962 to 1970
(Unit: KRW 100 million)
| Year |
National finance (A) |
Local finance (B) |
B/A (%) |
| Amount |
Index |
Amount |
Index |
| 1962 |
756 |
100 |
118 |
100 |
15.6 |
| 1963 |
608 |
80 |
160 |
114 |
26.3 |
| 1964 |
632 |
84 |
180 |
126 |
28.5 |
| 1965 |
1,055 |
140 |
233 |
167 |
22.1 |
| 1966 |
1,538 |
203 |
347 |
266 |
22.6 |
| 1967 |
1,990 |
263 |
464 |
363 |
23.3 |
| 1968 |
2,757 |
365 |
663 |
457 |
24.0 |
| 1969 |
3,760 |
497 |
1,027 |
715 |
27.3 |
| 1970 |
4,459 |
590 |
1,261 |
846 |
28.3 |
Source: KRILA, 1998, 403 and 118
Source: Korea Institute of Public Administration. 2008. Korean Public Administration, 1948-2008, Edited by Korea Institute of Public Administration. Pajubookcity: Bobmunsa.
2. Local Tax System
The local tax system underwent a major overhaul in the 1960s, which involved far-reaching reforms that were intended to simplify the local tax system, increase local revenue, and promote national economic development projects effectively. First, farmland, automobile, entertainment and food and beverages, mine lot, and horserace taxes, formerly in the national purview but more local in scope and nature, were converted into local tax items. On the other hand, local taxes such as fishing, special action, and transportation taxes were converted into national ones. Second, separate tax items imposed on the basis of income, such as the national education tax, local education and household taxes, and the like were either abolished or merged with the national income tax. Now local governments could levy surtaxes and value-added taxes on national income, corporate, and sales taxes. Third, the farmland tax was reintroduced as an independent tax to be levied by cities and counties (KRILA, 1998, 467, 470-471). This local tax system structure remained more or less intact throughout the decade.
[Table 4-7] Changes in Local Tax Items: 1961 and 1962
| Year |
General taxes |
Earmarked taxes |
| Provincial |
Municipal (levied cities and counties) |
| Surtaxes on national taxes |
Independent taxes |
Surtaxes on national taxes |
Surtaxes on provincial taxes |
Independent taxes |
| 1961 |
VATs on income, corporate, and sales taxes |
Property acquisition tax, automobile tax, entertainment and food and beverages tax, cattle slaughter tax, property tax, and license tax
* Additional tax items for Seoul: property and farmland taxes |
VATs on income, corporate, and sales taxes |
VATs on property acquisition, automobile, entertainment and food and beverages, cattle slaughter, and license taxes |
Property and farmland taxes |
Urban planning and public facility taxes (excepting provinces) |
| 1962 |
Same as above |
Same as above
* Additional tax items for Seoul and Busan: property and farmland taxes |
Same as above |
Same as above |
Same as above |
Same as above |
Source: LTA, amended yearly
Source: Korea Institute of Public Administration. 2008. Korean Public Administration, 1948-2008, Edited by Korea Institute of Public Administration. Pajubookcity: Bobmunsa.
3. Local Finance Adjustment System
(1) Local Subsidy Act (LSA)
The LSA, enacted in 1961, replaced the previous grants-in-aid for local government organizations. The LSA marks a significant advancement in the history of local finance in Korea, by, (1) being the first full legislation to determine the total amounts of subsidies to be provided; (2) defining the basic principles of local subsidies; (3) providing for and restricting special subsidies; and (4) rationalizing the method for determining the reference financial demand at each local government (KRILA, 1998, 423). In particular, the amendment of the LSA in 1968 led to an increase in the total amount of local subsidies to 17.6 percent of all domestic taxes combined in an effort to help local governments overcome chronic financial shortages.
The LFA, on the other hand, required the state to reduce the total amount to be provided to local subsidies, or to revoke part of the local subsidies already provided, in the event a given local government had incurred excessive spending in violation of the law and/or failed to collect the necessary revenue on its own through error or negligence.
[Table 4-8] Changes in the Local Subsidy System: 1960s
| |
LSA
December 31, 1961 |
LSA
December 5, 1963 |
LSA
April 27, 1965 |
LSA
July 15, 1968 |
| Sources of revenue |
Type-1: 40% of sales, entry, and electricity and gas taxes
Type-2: 85% of unrefined rice wine and liquor taxes |
Type-1: 40% of sales, entry, and electricity and gas taxes
Type-2: 43% of unrefined rice wine and liquor taxes |
50% of sales, electricity and gas, and liquor taxes |
17.6 percent of all domestic taxes combined |
| Special subsidies |
10% of Type-1 general subsidies |
Same as 1961 |
Same as 1961 |
Same as 1961 |
| Distribution of special subsidies by local government type |
20% to Seoul and the provinces, 15% to all other cities, and 65% to counties |
20% to Seoul, Busan, and the provinces, 30% to all other cities, and 50% to counties |
Same as 1963 |
Same as 1963 |
| Reasons for distribution of general subsidies |
Reference financial revenue of a local government falls short of its reference financial demand |
Same as 1961 |
Same as 1961 |
Same as 1961 |
| Reasons for distribution of special subsidies |
Extraordinary financial demand unaddressed in distributing general subsidies; natural disasters or other emergencies occurred after general subsidies were determined; construction, restoration, expansion, or repair of government and public facilities |
Same as 1961 |
Same as 1961 |
Same as 1961 |
Source: LSA, amended annually
(2) Central Government Subsidies
The Grant Management Act (GMA), enacted on November 1, 1963, defined the basic terms and conditions of providing subsidies, including the application procedure, the principles of decision-making, and spending-related requirements. But as the GMA underwent not a single amendment until its repeal in 1986, it failed to address and reflect changes occurring in local finance.
The proportion of central government subsidies in local finance decreased from 24.6 percent in the 1960s to 16.9 percent in the 1970s. This decline does not mean there was an absolute reduction in the amount of subsidies provided; rather, it reflects the steady increase in the amounts of local taxes and subsidies that local governments were able to gather (KRILA, 1998, 434-436).
[Table 4-9] Central Government Subsidies: 1962 to 1970
(Unit: KRW 100 million)
| Year |
Central government subsidies (a) |
Financial scale |
Proportion |
| National (b) |
Local (c) |
a/b |
a/c |
| 1962 |
29 |
756 |
118 |
3.8 |
24.6 |
| 1963 |
38 |
608 |
160 |
6.3 |
23.8 |
| 1964 |
35 |
632 |
180 |
5.5 |
19.4 |
| 1965 |
53 |
1,055 |
233 |
5.0 |
22.7 |
| 1966 |
50 |
1,538 |
347 |
3.3 |
14.7 |
| 1967 |
95 |
1,990 |
464 |
4.8 |
20.8 |
| 1968 |
118 |
2,757 |
663 |
4.3 |
17.8 |
| 1969 |
162 |
3,760 |
1,027 |
4.3 |
15.9 |
| 1970 |
213 |
4,459 |
1,261 |
4.8 |
16.9 |
Source: KRILA, 1998, 436
(3) Local Government Bonds
The LFA of 1963 required local governments to seek approval from respective local councils and the Secretary of Interior before the issuance of local government bonds. The constitutional requirement for local councils, however, did not materialize during this period as no separate statute was passed defining the timeline by which such bodies were to be formed. The Secretary of Interior’s approval therefore became the sole precondition for issuing local government bonds.
Source: Korea Institute of Public Administration. 2008. Korean Public Administration, 1948-2008, Edited by Korea Institute of Public Administration. Pajubookcity: Bobmunsa.
II. Local Finance under the Yushin Constitution (1972 to 1979)
1. Overview
The Presidential Decree on Emergency Measures for Economic Stability and Growth proclaimed in 1972, also known as the “August 3 Measures,” abolished the legal grant rates on local subsidies and made local subsidies a matter of annual national budget instead, thus reducing the proportion of local subsidies in combined domestic taxes from 17.6 percent to 11 percent. This extreme measure had a considerable contractionary impact on the autonomy and finance of local government organizations, while strengthening the central government’s control over local administration further.
(1) Supervision of Local Finance
Despite the rise of the Fourth Republic and the new August 3 Measures, the local fiscal policy supervision system remained more or less the same as the one utilized during the Third Republic. Notably, however, the LFA, amended on December 31, 1975, sided more with cities and counties by allowing them to determine the amounts of contributions they would make to provincial public works and civil engineering projects. Article 26.2 of the same Act, however, also required the heads of cities and counties to seek the approval of their respective governors, the heads of Busan and the provinces to seek the approval of the Secretary of Interior, and the head of Seoul to seek the approval of the Prime Minister before spending additional funds not yet formulated into an official supplementary budget. This last added provision further broadened the scope of the central government’s interference in local affairs.
(2) Revenue Structure
The local revenue structure in the early 1970s was heavily dependent on local subsidies. Beginning in 1973, however, the proportion of local taxes began to increase dramatically. This is because the proportion of local subsidies in annual domestic taxes combined was lowered from 17.6 percent to 11 percent, while the amendment of the Local Tax Act (LTA) on March 12, 1973, introduced the local resident tax, and the amendment of the same legislation on December 31, 1976, converted the business location tax, formerly earmarked for the national budget, into a local tax (KRILA, 1998, 406-407). All in all, however, the proportion of local finance to the national one stayed below 30 percent throughout the 1970s, as it did in the preceding decade.
[Table 4-10] Changes in Local Revenue Structure: 1971 to 1980
(Units: KRW 100 million and percentage)
| Year |
Total |
Local taxes |
Percentage (%) |
Non-tax revenue |
Percentage (%) |
Local subsidies |
Percentage (%) |
Central subsidies |
Percentage (%) |
| 1971 |
1,568 |
398 |
25.4 |
254 |
16.2 |
652 |
41.6 |
264 |
16.8 |
| 1972 |
1,764 |
466 |
26.4 |
308 |
17.5 |
673 |
38.1 |
317 |
18.0 |
| 1973 |
2,155 |
741 |
34.4 |
383 |
17.8 |
719 |
33.4 |
312 |
14.4 |
| 1974 |
2,718 |
1,097 |
39.7 |
520 |
19.1 |
813 |
30.0 |
305 |
11.2 |
| 1975 |
4,304 |
1,586 |
36.8 |
718 |
16.7 |
1,178 |
27.4 |
822 |
19.1 |
| 1976 |
5,680 |
2,270 |
40.0 |
1,032 |
18.2 |
1,515 |
26.6 |
863 |
15.2 |
| 1977 |
8,165 |
3,363 |
41.2 |
1,930 |
23.6 |
1,834 |
22.5 |
1,038 |
12.7 |
| 1978 |
10,856 |
4,457 |
41.1 |
2,626 |
24.2 |
2,469 |
22.7 |
1,304 |
12.0 |
| 1979 |
15,936 |
- |
- |
- |
- |
- |
- |
- |
- |
| 1980 |
19,454 |
7,678 |
39.5 |
4,407 |
22.6 |
4,100 |
21.1 |
3,269 |
16.8 |
Source: KRILA, 1998, 407
[Table 4-11] Comparison of National and Local Finances: 1971 to 1980
(Unit: KRW 100 million)
| Year |
National finance (A) |
Local finance (B) |
B/A (%) |
| Amount |
Index |
Amount |
Index |
| 1971 |
5,515 |
100 |
1,568 |
100 |
28.4 |
| 1972 |
6,053 |
110 |
1,764 |
113 |
29.1 |
| 1973 |
6,911 |
125 |
2,155 |
137 |
31.2 |
| 1974 |
11,887 |
216 |
2,718 |
173 |
22.9 |
| 1975 |
13,744 |
249 |
4,304 |
274 |
31.3 |
| 1976 |
22,983 |
417 |
5,680 |
362 |
24.7 |
| 1977 |
29,908 |
542 |
8,165 |
521 |
27.3 |
| 1978 |
40,405 |
733 |
10,856 |
692 |
26.9 |
| 1979 |
55,075 |
999 |
15,936 |
1,016 |
28.9 |
| 1980 |
66,352 |
1,203 |
19,454 |
1,241 |
29.3 |
Source: KRILA, 1998, 408
2. Local Tax System
The 1970s saw a surge in economic development projects, with all taxes reformed and redesigned to support the goals of those projects. Surtaxes and value-added taxes on national taxes were finally abolished in 1973, and the local resident tax was introduced in their stead to compensate for some of the losses to local tax revenue. In 1962, the registration tax was converted into a local tax, while the local tax on entertainment, food and beverages was converted into a national one. Cities and counties were also allowed to levy business location taxes for earmarked purposes, while their value-added taxes or surtaxes on provincial taxes were abolished.
[Table 4-12] Changes in Local Tax Items in 1973 and 1976
| Year |
General taxes |
Earmarked taxes |
| Provincial taxes |
Municipal taxes (levied by cities and counties) |
| Independent taxes |
Provincial surtaxes |
Independent taxes |
| 1973 |
Taxes on residents, property acquisition, automobiles, entertainment and food and beverages, cattle slaughter, horseraces, and licenses
*Additional tax items for Seoul and Busan: property and farmland taxes |
VATs on residents, property acquisition, automobiles, entertainment and food and beverages, cattle slaughter, and license taxes |
Property and farmland taxes |
Urban planning and public facility taxes (excepting provinces) |
| 1976 |
Taxes on property acquisition, registration, and licenses
* Additional tax items for Seoul and Busan: taxes on residents, property, automobiles, farmland, cattle slaughter, and horseraces |
None |
Taxes on residents, property, automobiles, farmland, cattle slaughter, and horseraces |
Urban planning, public facility, and business location taxes (excepting provinces) |
Source: LTA and its amendments
3. Local Finance Adjustment System
(1) Local Subsidies
The August 3 Measures (1972) called for absolute rigidity in national finance and abolished the legally required rate on local subsidies effective beginning in 1973. The measures thus pegged the total amount of local subsidies each year to the annual central government budget, thereby removing the legal grant rate system. The total amount of local subsidies could now make up only 11 or 12 percent of all domestic taxes combined. This measure severely weakened the ability of local governments to plan and manage their finances in any systematic and stable manner (KRILA, 1998, 427).
(2) Central Government Subsidies
The proportion of central government subsidies in either national or local finance also decreased in the 1970s, reflecting drastic cuts in the amount of national revenue being transferred to local governments after implementation of the August 3 Measures (KRILA, 1998, 437).
[Table 4-13] Central Government Subsidies: 1971 to 1980
(Unit: KRW 100 million)
| Year |
Central government subsidies (a) |
Revenue structure |
Proportion |
| National (b) |
Local (c) |
a/b |
a/c |
| 1971 |
264 |
5,515 |
1,568 |
4.9 |
17.0 |
| 1972 |
317 |
6,053 |
1,764 |
5.2 |
18.0 |
| 1973 |
312 |
6,911 |
2,155 |
4.5 |
14.5 |
| 1974 |
305 |
11,887 |
2,718 |
2.7 |
11.2 |
| 1975 |
822 |
13,744 |
4,303 |
5.9 |
19.0 |
| 1976 |
863 |
22,983 |
5,680 |
3.8 |
15.2 |
| 1977 |
1,038 |
29,908 |
8,165 |
3.5 |
12.7 |
| 1978 |
1,304 |
40,405 |
10856 |
3.2 |
12.0 |
| 1979 |
2,532 |
55,075 |
15,963 |
4.6 |
15.9 |
| 1980 |
3,269 |
66,352 |
19,454 |
4.9 |
16.8 |
Source: KRILA, 1998, 436
Source: Korea Institute of Public Administration. 2008. Korean Public Administration, 1948-2008, Edited by Korea Institute of Public Administration. Pajubookcity: Bobmunsa.
