The Korea Local Administration Review

This study aims to analyze the fiscal equalization function of the existing local fiscal adjustment system and to propose strategies for enhancing the effectiveness of diverse local fiscal adjustment mechanisms. Specifically, our investigation focuses on the reorganization of general subsidies to ensure that local governments’ revenue levels attain 50% of the median value according to the type of local government. Through rigorous analysis, we identify that Scenario 6 exhibits the most substantial fiscal equalization effect. This scenario involves segregating cities and counties and selecting entities with revenues below 50% of median value, excluding general subsidies from local tax revenues and local fiscal adjustment system revenues. Moreover, it advocates initially bridging the revenue gap to 50% of median value solely for cities and counties, subsequently distributing the residual funds to all cities and counties utilizing the existing general grant tax structure. Based on the empirical findings, we propose a policy objective for general subsidies: to guarantee that the financial support provided by the local fiscal adjustment system to all cities and counties is a minimum of 50% of the median value. This research sheds light on the potential for restructured fiscal adjustment mechanisms to promote fiscal equalization and stability across local jurisdictions.