Directions for the Introduction of a Horizontal Fiscal Equalization System for the PROTECTION of Financially Lagging Area in Korea

Purpose: The purpose of this study is to address the horizontal fiscal imbalance caused by the financial decen-tralization of local governments in Korea, and propose a direction for the introduction of the horizontal fiscal equalization system for the protection of financially lagging area. Method: To achieve the purpose of this study, the primary details of the first phase of financial decentraliza-tion were confirmed based on the theory of the financially lagging area and the horizontal mediation system. Furthermore, the regional synergistic development fund, which is a similar system currently implemented, and the direction of its introduction, were examined. Results: As a result of the study, first, the fact the regional balanced distribution is very much needed through the protection of financially lagging area and the regional solidarity was confirmed. Second, to introduce the hor-izontal fiscal equalization system, it is necessary to provide a direction for the introduction of the system which may achieve a basic agreement among the local governments, which are direct stakeholders. Third, the form of the system is introduced as a fund, and an expansionary system’s development plan based on the existing re-gional synergistic development fund system may be considered. Fourth, it is necessary to use the local consump-tion tax in terms of adequacy and stability of the financial resources and relaxing the tax revenue imbalance be-tween the local governments in connection with the fiscal decentralization. Fifth, as for the distribution index, it is necessary to use to the farthest extent possible the variables related to population, population characteristics, per capita income, and area, which are among the variables beyond the control of local governments. Sixth, it is nec-essary for the principal of management to secure a sufficient size for the local government for spending the finan-cial resources. Conclusion: The horizontal fiscal equalization system ought to, first, pursue a comprehensive development of balance for the region, and second, aim to address the gap in financial power between the regions, and third, be introduced in the form of complementing the vertical financial mediation.