[비즈한국] South Korea’s national tax revenue this year is estimated to reach an all-time high of 478.6 trillion won, driven by the semiconductor boom fueled by the artificial intelligence (AI) craze. Due to this surge in tax revenue, the excess revenue that could be earmarked for the government's planned "Future Response Fund" is estimated at 52.2 trillion won, with the total fund size projected to reach up to 218 trillion won.
While the establishment of a Future Response Fund exceeding 200 trillion won has gained momentum thanks to record-high tax revenues, local governments are gripped by concerns over shrinking revenues. This is because as the government diverts increased tax revenue into the Future Response Fund, local shared taxes (local allocation taxes) are being reduced. Local governments are required to contribute a certain percentage of funding for state-subsidized projects implemented by the central government.
Local governments with low fiscal autonomy rely heavily on local shared taxes for a significant portion of their funding. If this amount decreases, they not only struggle to properly carry out state-subsidized projects but also face shortages in the budgets for their own independent local projects. In particular, the number of state-subsidized projects, which were largely transferred to local governments during the Roh Moo-hyun administration, has begun to creep back up, exceeding 1,000 this year alone, deepening the concerns of local officials.
President Lee Jae-myung, while presiding over a cabinet meeting at the Blue House on September 29, remarked, "Did we not increase the discount support budget for this Chuseok from the initial 100 billion won to 190 billion won?" and added, "How about we increase this significantly to organize a budget of nearly 1 trillion won?" He further explained, "It can be (funded) through the Future Response Fund. It is also a task that helps alleviate polarization."
Following President Lee’s remarks, critics pointed out that the five categories defined in the government's "Draft Act on the Establishment and Operation of the Future Response Fund"—general, youth, growth engines, regional, and education/talent—do not include food discount support. This has fueled growing concerns that the increased tax revenue could be used as a "slush fund" by the government.
While the government has gained more usable funds by setting abstract purposes for the Future Response Fund, local governments are seeing their available funds shrink because of it. Local shared taxes distributed to local governments are fundamentally based on 19.24% of national taxes. Therefore, as tax revenue increases, local shared taxes should naturally rise as well. However, the government has decided to prioritize depositing excess and additional tax revenue into the Future Response Fund and then distribute 19.24% of the remaining amount as local shared taxes.
Local governments point out that in this scenario, next year’s local shared taxes will amount to 67.6 trillion won, a decrease of 29.6 trillion won from the original expected scale. In particular, they estimate that for local governments outside the capital region, the reduction will reach 30.5 trillion won.
The problem is that the government continues to increase state-subsidized projects that require mandatory local government funding every year. State-subsidized projects are a system where the government specifies a purpose and provides money (state subsidies) to local governments to carry out projects. In this process, the government does not cover the full cost but requires the local government to pay a certain proportion, known as "matching local funds." Consequently, as the number of state-subsidized projects grows, the mandatory contribution required from local governments increases accordingly.
Pointing out that these state-subsidized projects were becoming a burden, the Roh Moo-hyun administration transferred 163 out of 533 such projects to local governments in 2005. As a result, the number of state-subsidized projects was reduced to 384 in 2006. However, they began to increase again thereafter. By 2017, the number of projects had risen to 960, a 2.5-fold increase in about a decade since the decentralization efforts. The growth continued, reaching 1,062 in 2019. Although some adjustments have been made since, 1,003 state-subsidized projects are being implemented in 2025, moving in the exact opposite direction of fiscal decentralization.
With the rise in state-subsidized projects, the burden of matching local funds is also increasing rapidly. According to the Ministry of the Interior and Safety, the amount of matching local funds, which was 22.4 trillion won in 2017, exceeded 30 trillion won in 2021, and this year it broke through the 40 trillion won mark to reach 44.9 trillion won. As a result, the budget available for local governments to conduct their own projects is shrinking every year.
The National Assembly Budget Office analyzed that the share of independent local projects, which was 41.1% in 2017, has fallen to 34.1% this year. If local shared taxes are reduced due to the Future Response Fund, the resources available for local governments to use for regional economic development or improving the lives of residents will decrease even further.