Thanks to a semiconductor boom and other factors, next year's national tax revenue is expected to rise by 169 trillion won from this year, but the increase in the ordinary grant-in-aid (non-earmarked tax) going to local governments is projected to be only 1.3 trillion won. That is because the government plans to change the system so that 162.3 trillion won of the increased tax revenue is first set aside in a "future response fund" before calculating the local grant-in-aid (non-earmarked tax). Local governments nationwide are pushing back, saying, "If the plan is to create a fund for the future, isn't it reducing the resources that localities can use autonomously?"
◇Future fund that slices off 162 trillion first… grant-in-aid reduced by 30 trillion
According to the Ministry of the Interior and Safety and other related ministries on the 10th, the government plans to establish a future response fund worth 162.3 trillion won based on additional tax revenue next year. Due to the boom in the semiconductor industry and other effects, next year's national tax revenue is expected to increase 40.7% (169 trillion won) from this year's supplementary budget baseline.
The problem is that with the creation of the future fund, the way the grant-in-aid (non-earmarked tax) is calculated will also change. Under the current Local Grant-in-Aid Act, 19.24% of the national tax collected by the central government is allocated as the financial resource for the grant-in-aid (non-earmarked tax). But under the government's reorganization plan, the amount set aside for the future response fund is first deducted from the national tax, and 19.24% of the remaining amount is distributed as the grant-in-aid (non-earmarked tax).
In effect, the formula for calculating the grant changes from "national tax × 19.24%" to "(national tax − future response fund set-aside) × 19.24%." Compared with applying the existing formula without deducting the future fund, the financial resources for the grant-in-aid (non-earmarked tax) would decrease by about 30.5 trillion won.
Assuming the same ordinary grant-in-aid (non-earmarked tax) distribution structure as this year, the Korea Institute of Public Finance and Management calculated that Gyeongbuk's reduction in grant-in-aid under the existing formula would have reached 4.7 trillion won. Jeonnam would see 3.8 trillion won, Gyeongnam 3.4 trillion won, Gangwon 3.1 trillion won, Jeonbuk 2.7 trillion won, and Chungnam 2.6 trillion won.
◇Government says "grant increases"… local governments say "autonomous resources shrink"
The government says the total aggregates of next year's grant-in-aid (non-earmarked tax) will rise from this year. Next year's ordinary grant-in-aid (non-earmarked tax) is about 67.6 trillion won, up about 5.9 trillion won from this year's main budget of 61.7 trillion won and about 1.3 trillion won from the 66.2 trillion won based on the supplementary budget. The government also plans to use 15.3 trillion won from the future response fund for the local account.
Local governments counter that "the nature of the money coming down to the local level is different." Most central government subsidies or fund projects have specified purposes and methods. In contrast, the grant-in-aid (non-earmarked tax) is an autonomous resource that local governments can allocate based on local conditions.
The Ministry of the Interior and Safety (MOIS) National Archives' commentary on the grant-in-aid (non-earmarked tax) system also explains the grant-in-aid (non-earmarked tax) as "having the character of an independent, inherent resource of local governments," adding that "it is not simply an earmarked tax supported by the state but a type of tax revenue granted by the state."
◇Government says "grant increases"… local governments say "autonomous resources shrink"
Choo Kyung-ho, the Daegu mayor who previously served as Deputy Prime Minister and Minister of the Ministry of Economy and Finance, recently issued a statement saying, "A fund for the future must not steal the future of the regions." Choo said, "The reduction in the grant-in-aid (non-earmarked tax) is highly likely to lead to the downsizing of pending projects outside the capital area, deterioration in the quality of essential administrative services, and additional issuance of local government bonds."
Kim Min-jae, Vice Minister of the Ministry of the Interior and Safety (MOIS), visited Daegu City Hall on the 8th and explained to Choo the purpose of creating the future fund and the details of the grant-in-aid (non-earmarked tax) overhaul. At the meeting, Choo also said, "The creation of the fund must not reduce the autonomous resources that should be allocated to localities under the current grant-in-aid (non-earmarked tax) standards," arguing that the local share should be allocated first under the Local Grant-in-Aid Act, with the remaining increase in national tax used to establish the future fund.
Lee Sang-min, a senior research fellow at the Korea Institute of Public Finance and Management, said, "The future fund is a central government fiscal project in which the central government decides the project targets, purposes, and support methods," adding, "If the central government reduces the general resources that local governments could use autonomously and then provides support in a design set by the central government, local fiscal autonomy will, if anything, decline."
He added, "While changing the calculation method for more than 30 trillion won of local general resources, not presenting the impact by local government and a sufficient consultation process is problematic from the perspective of fiscal decentralization," and said, "The direction of fiscal decentralization is to expand local fiscal capacity while also increasing authority over functions and policy decisions."