Addressing Challenges

Uneven Fiscal Allocation and Imbalanced Regional Development

1. The central government's policies on funds allocation heavily favor the six special municipalities over the 16 counties and cities, leading to an inconsistent allocation standard. In the case of 2024, after adding the special subsidies derived from the losses of business tax contributing for the "Financial Industry Special Reserve Fund" to the statutory amount of the " Act Governing the Allocation of Government Revenues and Expenditures," the six special municipalities will receive 65% of the total allocation, while the 16 counties and cities will receive only 35%.  

2. Despite the small territory of Taiwan, there is a significant disparity in per capita allocations existing not only between the special municipalities and the counties and cities but also among those special municipalities. This situation makes it challenging to address the issue of fairness concerning financially weak counties or cities, and adjustments to the formula are evidently necessary.

3. In 2024, for example, each resident in Taipei City will receive an average allocation of 24,065 NTD, while in New Taipei City, the average amount will be only 11,613 NTD. Similarly, each resident in Taichung City will receive 13,623 NTD, Kaohsiung City residents will receive 15,879 NTD on average, Changhua County residents will receive 10,600 NTD on average, and Hsinchu County residents will only receive 9,481 NTD on average.

Centralized Fiscal Control and Strained Local Finances

1. The“Act Governing the Allocation of Government Revenues and Expenditures has not been amended for over 20 years, and the allocation ratios for subsidies are far from "reasonable" and "fair" to address the issue of financial shortcomings and deficiencies for local governments. Reform is urgently needed.

2. Local governments are unable to demonstrate the spirit of autonomy if they rely on the central government for the allocation of taxes, subsidies, and revenue sharing. In 2021, 16 counties and cities raised funds accounted less than 50% of their budgets, with even eight of them accounted less than 20%. Taipei City has the highest percentage at 63.88%, followed by Kaohsiung City at 46.34%, New Taipei City at 58.57%, Tainan City at 37.78%, Taitung County at 12.22%, Chiayi County at 13.10%, and Penghu County, the lowest one, at only 6.19%.

3. Central government funding is divided into two tracks, namely consolidated allocation and general subsidies, managed by the Ministry of Finance and the Directorate-General of Budget, Accounting and Statistics respectively. This dual-track system lacks unified authority.

4. The regulations fail to provide adequate incentives for enhancing fiscal discipline of local governments. Contents of relevant laws or regulations, including the "Local Government System Act," " Act Governing the Allocation of Government Revenues and Expenditures," and "Central Government Subsidy Measures for Municipalities," tend to be punitive rather than incentivizing.

5. Despite receiving around 270 billion NTD annually of the central government allocations, 36 billion NTD of revenue sharing and extra 170 billion NTD of general subsidies, local governments still required financing and borrowing of approximately 13 billion NTD over the three years between 2018 and 2020. This indicates that local governments’ finance remains constrained, and the scale of financial transfers from the central government is evidently insufficient.

Solutions

Rebuilding the Subsidy and Funds Mechanism

1. Establishment of a "tax revenues allocation committee" in the central government: Reserve a certain percentage of funding as an incentive for local governments to improve fiscal efficiency. Local governments with better fiscal efficiency should receive more consolidated allocation funds. For those with fiscal inertia, measures such as suspending disbursements, offsetting, and withholding consolidated allocation funds should be imposed. A dual approach mechanism should be introduced.

2. Currently, the Ministry of Finance and the Directorate-General of Budget, Accounting and Statistics are in charge of the central government subsidies respectively. These responsibilities should be merged into one agency and the legal hierarchy of regulations governing subsidies and financing to local governments should be elevated.

3. Ensure "fairness" in the consolidated funds allocation and provide incentives for local governments with good performance. This involves preserving indicators related to the fairness of distribution, such as the population and area stipulated in the " Act Governing the Allocation of Government Revenues and Expenditures," while removing those related to performance. Additionally, increase local revenue sharing, allowing the 5% of "profit-seeking enterprise income tax" to be entirely retained by local governments. This measure allows well-performing local governments to gain more tax revenue from this source. In parallel, inheritance tax and land value increment tax should also be adjusted.

4. Review local government debt ceiling mechanism. If there is no statutory borrowing capacity and no actual funds available from the previous fiscal year's surplus, local governments tend to artificially underestimate tax revenues through the budgeting process, creating an off-the-record solution. In the future, a "flexible debt ceiling mechanism" for local governments should be established to prevent over collection of taxes in case of insufficient financial resources.