By Yoon Ja-young
The total debts of local governments are soaring at an alarming pace as they issued bonds to fund various economic stimulus projects amid falling tax income.
With their debt accounting for nearly 8 percent of total government debt, some economists are expressing concern that they may face a fiscal crisis not unlike that of Greece.
According to the Bank of Korea, the country's government debt totaled 321 trillion won as of the end of last year, within which the deficit of local governments was 25.6 trillion won, or 8 percent of the total.
Their combined debt soared by 34.2 percent last year. Seoul had its debt double to 3.1 trillion won from 1.6 trillion won, and South Jeolla Province, South Chungcheong Province, Incheon and North Chungcheong Province saw an over 50 percent increase.
This surge is a result of issuing bonds to fund various economic stimulus projects, such as construction projects, at a time of low interest rates.
Their tax income, however, is falling. Levies on real estate such as acquisition, registration, and property holding taxes are the biggest sources of tax income for provincial governments. With the bursting of the real estate bubble local governments must deal with the related fall in tax income.
President Lee Myung-bak administration's cutting of comprehensive real estate tax, normally allotted to local governments, also made halved income from this source.
The National Assembly's Budget Office said that local governments will experience a drop of 18.6 trillion won in their fiscal income until 2012, due to a series of tax cuts.
Urban development corporations set up by the local governments to engage in various construction projects are another potential threat to their fiscal health. These development corporations under 14 local governments issued over 14 trillion won bonds as of February, a steep increase from 800 billion won in 2007. If their business situation deteriorates, their losses should be sustained by local governments.
Economists say that a lesson should be learned from Greece, which is currently suffering a fiscal crisis, or from Japan where some local governments already went bankrupt due to debt.
The problem already seems serious. Nam District in Busan, for example, issued 2 billion won worth of local government bonds earlier this year as it had no money to pay its employees' salaries.
The National Assembly said that the governments should pay more attention to fiscal health as spending on social welfare will ultimately rise considering the aging population.