The annual fight between the local and central governments over the tax redistribution fund has begun once again. The Ministry of Finance has tentatively approved a plan to cut the share of funds allocated to two special municipalities -- Taipei and Kaohsiung -- from 43 percent to 36 percent. Meanwhile, the rest of the country will see its share rise from 39 percent to 45 percent.
The cut will translate into a loss of NT$10.6 billion for the two cities, which are already having financial difficulties. Under election-year pressure, even DPP Chairman and Kaohsiung Mayor Frank Hsieh (謝長廷) has made high-decibel complaints to the Executive Yuan. Still, the NT$10.5 billion increase for the other 21 cities and counties is no cause for joy given the NT$40 billion to NT$50 billion total shortfall they face.
For the first time, Taipei and Kaohsiung will get a smaller share of the pie than the rest of the country, but the change will do little to end confrontation.
The financial problems besetting local governments have more to do with the size of the pie than the way that pie is divided. The government cannot resolve local financial issues by merely adjusting the allocation percentages without actually reviewing the distribution of income sources between the central and local governments. Simply adjusting allocation will only encourage further disputes between local governments.
The financial difficulties facing other cities and counties will remain unresolved even after Taipei and Kaohsiung Cities share more of their resources with them. Without developing new income sources and becoming more prudent with spending, local governments will be prolonging their financial dependency on the central government. What the central government is doing now only encourages irresponsible local government.
The central government cannot sit on the sidelines if the problem is to be resolved. The central government should set up a simple and clear priority system for allocating sufficient funds to meet the financial needs of local governments.
First, it must define a set of "standard needs," including salaries and basic personnel costs for basic educational institutions such as elementary and junior high schools, police, firefighting and other civil services, as well as for infrastructure, basic social welfare spending, etc. Local government representatives may discuss and reach a consensus on these standards. They may first set a per capita standard and then add other adjustment standards according to local characteristics. After deducting the incomes that local governments can generate by themselves, the central government should fully finance the difference with the tax redistribution fund. Inevitably, the base for the tax redistribution fund will have to be enlarged. For example, the government may allocate a larger share of business-tax revenues to the fund.
More than 80 percent of local governments' financial problems will be resolved once their basic needs are met. Then, local governments will have no excuse for stretching out their hands and begging for money. Instead, they will have to depend on their own frugality. Also, local government heads will have an incentive to exercise financial prudence. Political accountability will then naturally follow.
Once responsibility and power are decentralized, the central government will be able to concentrate on adjusting its own finances. It can set up a carrot-and-stick system for local-government performance in "financial pie-making."
The government's failure to look for systemic solutions will only result in the annual battle for funding that will be repeated year after year.
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