Does the size of local government debt affect the level of debt of off-budget entities? The case of local government in Korea
| Published date | 01 June 2020 |
| Author | Seong-ho Jeong |
| DOI | 10.1177/0020852317733314 |
| Date | 01 June 2020 |
| Subject Matter | Articles |
Article
International
Review of
Administrative
Sciences
Does the size of local
government debt affect
the level of debt of
off-budget entities?
The case of local
government in Korea
Seong-ho Jeong
Korea Public Finance Information Service, Korea
Abstract
The rapid growth of debt of off-budget entities is the result of budgetary constraints.
When local governments face fiscal stress, with rising debt, they tend to rely on local
public enterprise debt to minimize debt limits and budgetary constraints. This study
tests how the debt level of local governments affects the debt level of off-budget
entities in 16 Korean metropolitan cities and provinces from 2008 to 2013, applying
panel regressions. The results assert that as the debt of a local government increases,
public enterprise debt increases accordingly. The findings confirm that public enter-
prises are used to lessen budget pressure by increasing the total public debt.
This practice is like concealing local government debt by using off-budget entities,
which eventually creates a fiscal illusion.
Points for practitioners
Off-budget entities are tools for bigger government and larger debt, so it is necessary
to control the use of off-budget debt by imposing ceilings on the off-budget debt limit.
From a comprehensive debt management perspective, off-budget entities should be
used less to pursue government projects. Additionally, a segmented accounting system
should be introduced within the off-budget entities.
Corresponding author:
Seong-ho Jeong, Research Center,Korea Public Finance Information Service, Metrotower 10, Toegyero,Jung-
gu, Seoul, 04637, Korea.
Email: jazzsh@kpfis.kr; jazzsh@daum.net
International Review of Administrative
Sciences
2020, Vol. 86(2) 333–348
!The Author(s) 2018
Article reuse guidelines:
sagepub.com/journals-permissions
DOI: 10.1177/0020852317733314
journals.sagepub.com/home/ras
Keywords
budgetary constraints, fiscal illusion, Korean local government, off-budget debt,
on-budget debt
Introduction
Many countries execute off-budget projects using public enterprises and public–
private partnerships, but off-budget activities vary in scope. As government fiscal
constraints are increasingly placed on-budget, in many countries, both central and
local governments have used more off-budget entities (e.g. build–transfer–lease
(BTL) and build–transfer–operate (BTO) projects) to circumvent budgetary and
debt limits applicable to on-budget entities. This practice has caused the public
sector debt to increase overall. For this reason, off-budget fiscal activities have
recently emerged as an important research agenda in the field of public finance
around the world. Korea is no exception to this trend. Growth in public enterprises
of off-budget fiscal activities by both central and local governments in Korea
extends the size and the debt level of the public sector at the central and local
levels, which is considered to be a new debt burden. In principle, government
projects should be on-budget but governments often implement on-budget projects
through public corporations due to budget constraints.
As a result, it is necessary to closely monitor and control the increasing size of
the fiscal debt level of off-budget entities as this directly, and indirectly, affects
future fiscal health in the public sector. Off-budget entities collect revenue and
spend money on projects they pursue. However, the increase in the size of expen-
ditures of off-budget entities is considered to be a primary reason behind weaken-
ing budget control, expanding public sector budgets, and increasing government
debt levels.
Off-budget fiscal activity defined as government fiscal activity is not included in
the government budget, but included in a separate account (Schick, 2007 [1981]).
In Korea, a typical off-budget entity could be one of two types of institutions:
public institutions that adhere to the Law of the Management of Public
Enterprises; and public enterprises that adhere to the Local Government Public
Enterprises Act. The problem with off-budget fiscal activity in Korea is especially
serious as the Korean government frequently conducts quasi-fiscal activities
through off-budget entities to pursue government projects. In practice, off-
budget fiscal activity is not counted as a central and local government debt
based on Government Finance Statistics, but it is counted as public sector debt.
The use of off-budget entities by local governments, however, directly increases
public sector debt in the US, so budget constraints placed on local governments,
like Proposition 13 in California, inflate the use of off-budget debt that causes
fiscal expansion in the public sector (Bennett and DiLorenzo, 1982, 1983). In
addition to expanding the size of public sector debt at both the central and local
government levels, off-budget fiscal activities also represent a social problem in
334 International Review of Administrative Sciences 86(2)
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