Gyeonggi's fiscal crisis stems from unchecked spending

Gyeonggi declared a fiscal emergency on Aug. 5 and is preparing a supplementary budget that will cut spending already approved. It is alarming that the finances of Korea’s largest provincial government, with 14.2 million residents, have deteriorated to the point that Gov. Choo Mi-ae compared the situation to “parched land where not even a blade of grass remains.” Yet the crisis was also foreseeable.

Choo blamed the central government, complaining that because Gyeonggi receives no local allocation tax, it cannot repair its finances when “the fiscal dam collapses.” She also called for a fairer distribution of tax revenue, arguing that municipalities including Yongin, Hwaseong, Pyeongtaek, Icheon and Suwon retain all corporate local income taxes paid by semiconductor companies, totaling 1 trillion to 3 trillion won ($7.05 million to $2.27 billion) annually.

Whether Choo’s argument is justified requires further examination. But the proper place to start when diagnosing deteriorating finances is spending rather than revenue. Whether for a household, local government or nation, sound finances begin with planning expenditures according to income. Ignoring that principle inevitably invites crisis.

Gyeonggi reduced its debt by more than 2 trillion won during Nam Kyung-pil’s governorship, which began in 2014. Debt then increased by more than 1 trillion won under Gov. Lee Jae Myung, partly because of universal disaster relief payments and local currency issuance.

During Kim Dong-yeon’s four-year term, his administration continued youth basic income and local currency programs while welfare spending surged from 14 trillion won to 19.6 trillion won. To finance these expenditures, Gyeonggi issued large amounts of municipal bonds and diverted various funds into its general account, eventually pushing itself toward the current crisis. The deterioration now threatens programs affecting seniors, children and pregnant women.

Gyeonggi’s main budget exceeded 40 trillion won for the first time this year. Its debt-to-budget ratio is 15.5 percent, still below the Ministry of the Interior and Safety’s threshold for a fiscal crisis. But Gyeonggi has declared an emergency despite a fiscal independence ratio of 44 percent, well above the national average of 32.3 percent. Other local governments may face heavier burdens.

Daejeon, for example, announced fiscal reforms after its municipal bond debt increased by 580 billion won over four years.

The alarm sounded by Gyeonggi should resonate nationwide. Local governments should learn from its experience what unchecked spending and competition to offer politically popular benefits can ultimately bring.