Local finances strained due to gov’t expansionary spending

(Yonhap)

South Korea’s local governments are facing a surge in matching contributions that are required alongside central government subsidies as the new government in the country emphasizes expansionary fiscal policy.

According to the 2026 budget proposal released on Sunday, local governments across the country will need to allocate 45.13 trillion won ($32.41 billion) in matching funds for subsidized projects in 2026 - up 10.4 percent from 2025.

Matching contributions have steadily increased from 32.8 trillion won in 2021, surpassing 45 trillion won in 2026. This is a rise of nearly 37 percent over just five years and also marks the first time in four years since 2022 that the growth rate has reached double digits.

Matching contributions refer to the local government portion of funding required for state-subsidized projects designed by the central government. As central funding for areas such as social welfare expands, local governments are compelled to inject more resources, reducing budget flexibility.

The increase in the 2026 matching contributions stems largely from the government’s expansionary fiscal stance. With total spending set at 728 trillion won, an 8.1 percent rise from 2025, state-subsidized projects have also been scaled up.

For its part, the subsidy budget for local governments is set to reach 104.92 trillion won in 2026, up 11.6 percent from roughly 94 trillion won this year.

The problem is that while mandatory matching expenditures keep growing, local fiscal resources remain weak. A pillar of local finances is the general grant tax collected and distributed by the central government. However, the tax has been cut to offset revenue shortfalls from 2023 to 2024.

Meanwhile, local tax revenues have been volatile: after hitting 118.6 trillion won in 2022, they dropped to 112.5 trillion won in 2023 and recovered only slightly to 114.1 trillion won in 2024.

Criticism has mounted that local fiscal autonomy is being eroded by rising mandatory expenditures tied to central government initiatives.

“Most welfare spending is carried out via state-subsidized programs planned by the central government, leaving very limited autonomy for local governments,” the Jeonbuk Institute noted in a 2023 report. “Expenditures are bound to rise thanks to a low birth rate and an aging population, further adding to the local fiscal burden.”

There are also growing calls for legislative reform as concerns intensify over local governments being swayed by central fiscal policies.

A bill was introduced in the National Assembly in July 2025 to amend the Local Finance Act, which requires approval by three-quarters of local government representatives at a Central-Local Cooperation Council meeting if a project’s local funding burden exceeds 10 percent of total costs.

Experts view expanding central support or restructuring the subsidy system as essential.

“The expansion of state subsidies not only undermines overall fiscal efficiency but also rigidifies local expenditures and weakens fiscal soundness,” Cho Ki-hyun, former president of the Korean Association for Local Finance, wrote in a contribution.