The ruling Democratic Party of Korea and the government met on the 29th to address concerns that the creation of a new future response fund could reduce local government grants. Both sides agreed that the fiscal autonomy of local governments must not deteriorate and pledged to reflect regional concerns in upcoming budget and legislative reviews. Local officials went further, calling for an increase in the local grant rate itself, which has been fixed at 19.24% of domestic tax revenue.
Kim Min-seok, leader of the Democratic Party, said at a party-government meeting on the future response fund held at the National Assembly members' office building that "not all of the increase in national tax revenue will be set aside for the future response fund." He added, "We are also listening carefully to concerns that local tax revenue could fall short or that the fiscal autonomy of local governments could deteriorate in connection with the new fund." He said the party would work to ensure that "regional issues are faithfully reflected in the future response fund and next year's budget, and that the distinct circumstances of each region are properly taken into account."
The future response fund, presented by the government alongside next year's budget, is sized at 162.3 trillion won. The plan calls for setting aside increases in domestic tax revenue that exceed the growth trend of the past decade, then investing in four areas including young adults, future growth and local education, while using the fund as a fiscal buffer against revenue swings. If additional excess tax revenue materializes this year, the fund could exceed 200 trillion won.
What worries local governments is that the base of domestic tax revenue used to calculate local grants could shrink as money is set aside for the fund. Local grants are currently financed with 19.24% of domestic tax revenue. If the government excludes the additional revenue channeled into the future response fund from the grant calculation, the increase in grants actually distributed to localities could be smaller than initially expected, even if the statutory grant rate is maintained.
Yoon Ho-jung, Minister of the Interior and Safety, said he had "heard through various channels that local governments are concerned that the design of the future response fund will shrink local grants relative to projections." He added, "Local grants for 2027 are designed to increase from this year, but there is some gap with what local governments expect," and said "a process in which central and local governments consult and coordinate views together is essential."
Floor leader Han Byung-do said, "We are hearing a great deal in the field about the depth of local governments' worries, including concerns over reduced local grants and the burden of local matching funds." He added, "Through today's meeting we will listen fully to local voices and reflect them carefully in the upcoming budget and legislative reviews."
The government's position is that it will offset concerns over reduced grants through measures such as a local account within the future response fund. Park Hong-keun, Minister of Planning and Budget, said, "Because we are adjusting the base of local grants, which is linked to domestic tax revenue, I deeply understand the worries and concerns of metropolitan mayors and provincial governors." He stressed that "support for local governments will by no means thin out."
Park said the government would foster regional industrial hubs and support local talent and essential medical care, while expanding the range of projects covered by preferential treatment for localities and block grant programs under the special account for balanced regional development. He also said a local account would be established within the future response fund to respond to regional needs, including local future growth subsidies.
Local officials also called for revising the grant rate itself. Park Chan-dae, chairman of the Governors Association of Korea and mayor of Incheon, said, "Local grants fell repeatedly because of the massive revenue shortfalls under the previous Yoon Suk-yeol administration." He said, "As revenue recovers, we hope that the recovery will also flow back to localities so they can refill their empty coffers." He added, "The local grant rate has remained unchanged for 20 years since 2006," and urged the government "to also discuss adjusting the grant rate in line with the direction of fiscal decentralization, which is one of the administration's policy tasks."
At the meeting, the party and the government agreed to supplement the design and use of the future response fund to reflect the fiscal conditions of local governments and the characteristics of each region.
After the closed-door session, Gangwon Governor Woo Sang-ho said, "Going ahead with the plan as currently drawn up would be somewhat difficult." He said, "There was consensus to the extent of making some revisions and supplements." He added, "There was consensus on trying to adjust the plan in a way that somewhat increases the amount of support going to local governments," and said "the party and the government need to consult and find an effective method."
