Interior Minister Yoon Ho-jung said on the 6th that the government is drawing up plans to cover the entire cost of projects under a newly created Future Response Fund, aiming to spare local governments from matching contributions.
Yoon made the remarks during a parliamentary audit of the Ministry of the Interior and Safety held by the National Assembly's Public Administration and Security Committee. He was responding to a question from Rep. Park Jung-hyun of the Democratic Party of Korea, who asked whether local finances would lose flexibility as local allocation tax revenue falls below what municipalities would otherwise have received because of the new fund.
Starting next year, the method for calculating local allocation tax will change with the creation of the fund, and the tax is projected to come in about 30.6 trillion won ($21.3 billion) lower than under the existing formula. Currently, 19.24% of internal taxes is set aside as the source for local allocation tax. From next year, the amount set aside for the Future Response Fund will first be deducted from internal taxes, and the allocation tax will be calculated on the remainder.
To offset the reduction in local finances, the government will designate 15.3 trillion won of the 162.3 trillion won fund as a local account. Of that, 3.5 trillion won will be provided as local future growth support funds that local governments can spend at their own discretion, with the rest to be provided in the form of individual project budgets.
When Park argued that this money, unlike local allocation tax, would also weaken local fiscal autonomy because it is provided as project budgets, Yoon added that the ministry is considering giving local governments the lead in decision-making and policy design for the projects.
Lawmakers also said a mechanism is needed to reliably make up for the drop in local allocation tax caused by the fund. Rep. Lim Ho-seon of the Democratic Party of Korea called for changes to the system, noting that the local education finance grant was given an automatic adjustment mechanism during its overhaul to guarantee a certain level of funding, while local allocation tax was left to discretionary support without any such mechanism.
Yoon replied that the local education finance grant can be funded at levels far below its trend line. "There is no rule requiring a fixed-rate increase, but local allocation tax differs in that a fixed-rate increase is guaranteed," he said.
Opposition lawmakers criticized the arrangement as strengthening the central government's control over finances by channeling money that would have gone to local governments into the fund. Responding to a related question from Rep. Kwon Young-jin of the People Power Party, Yoon countered that the 19.24% local allocation tax rate remains unchanged and that the aim is to secure strategic investment capacity for the future. He added that the total local allocation tax, about 63 trillion won this year, will rise to around 70 trillion won next year.
