Net surplus and outstanding local debt across local government types: evidence from the Republic of Korea

Abstract

This study examines the relationship between net surplus and outstanding local debt in 243 Korean local governments from 2011 to 2023 using panel data. The results show that higher net surplus is significantly associated with lower outstanding debt in metropolitan cities and provinces, cities, and counties, although the magnitude is modest. A 1% increase in net surplus is associated with up to a 0.599% decrease in outstanding debt. No significant relationship is found for districts, which generally have little or no debt. These findings suggest that net surplus can support debt reduction, but debt should not be reduced uniformly or immediately. Debt policy should distinguish liabilities requiring prompt repayment from productive debt financing long-term capital investment. Accordingly, local governments should strengthen the institutional linkage between net surplus and debt management selectively while maintaining fiscal flexibility for productive investment. This study provides empirical evidence using cash-based fiscal measures.