Ministry of Planning and Budget Minister Park Hong-keun and Education Minister Choi Kyo-jin deliver opening remarks at a public forum on reforming the local education finance grant system at Government Complex Seoul in Jongno-gu on July 8. [The Herald Business DB]
Ministry of Planning and Budget Minister Park Hong-keun and Education Minister Choi Kyo-jin deliver opening remarks at a public forum on reforming the local education finance grant system at Government Complex Seoul in Jongno-gu on July 8. [The Herald Business DB]

The government is expected to announce plans for a new Future Response Fund and a reform of the local education finance grant system as early as this week.

The Future Response Fund is projected to approach 100 trillion won ($70.7 billion), reflecting the additional tax revenue anticipated from an unprecedented semiconductor boom.

For the grant system, the leading proposal would scrap the current domestic tax linkage formula and instead calculate the following year's grant amount based on the nominal growth rate and changes in the school-age population.

However, the two ministries have yet to find common ground. The Ministry of Education has demanded that legislation explicitly guarantee the current grant level, while the Ministry of Planning and Budget has rejected that demand.

According to officials familiar with the matter, the Ministry of Planning and Budget plans to unveil the Future Response Fund proposal on Thursday or Friday.

The fund is intended to channel the massive additional tax revenues expected from the semiconductor supercycle into concentrated investment in youth, future growth engines, regional development and talent.

The ministry said it would deposit into the fund any large-scale tax revenue increases that exceed the long-term trend.

Based on explanations provided so far, the benchmark long-term trend is expected to be the 10- or 20-year average annual growth rate of domestic tax revenue.

In the fund's inaugural year — next year — contributions are projected to equal the amount by which domestic tax revenue exceeds the 10- or 20-year average annual growth rate of 6.1 percent.

Applying that long-term trend to this year's supplementary budget domestic tax figure of 368 trillion won, next year's domestic tax revenue is estimated at 390 trillion won.

Separately, the ministry currently projects next year's total national tax revenue at 500 trillion won or more. Given that domestic taxes account for roughly 90 percent of national tax revenue, next year's domestic tax take is estimated at 450 trillion won or more.

Arithmetically, subtracting the long-term trend estimate of 390 trillion won from the projected domestic tax figure of 450 trillion won or more yields a Future Response Fund contribution of 60 trillion won or more.

That, however, is a conservative estimate. The recent semiconductor-driven tax windfall is being led by two categories — income tax boosted by higher special bonuses, and corporate tax lifted by strong earnings — both of which fall under domestic taxes.

Corporate tax revenues reflecting this year's earnings will be collected in earnest next year, after year-end settlements are finalized, meaning the domestic tax estimate for next year could rise considerably.

The share of domestic taxes within total national tax revenue is also likely to exceed the usual 90 percent. In practice, domestic taxes accounted for 93.0 percent of national tax revenue from January through June this year, even though only a portion of the corporate tax windfall had been captured.

If the domestic tax share rises to 95 percent of national tax revenue next year, the domestic tax estimate would expand to 475 trillion won or more. Subtracting the long-term trend estimate of 390 trillion won from that figure would put the Future Response Fund at 85 trillion won or more.

Alongside this, the government is also reportedly considering allocating to the fund the difference arising from the grant reform — equivalent to the current grant rate of 20.79 percent of domestic tax revenue.

Taking that into account, the Future Response Fund could reach 100 trillion won.

How the fund would be spent is also a point of contention. The Ministry of Planning and Budget favors directing it primarily toward higher education, lifelong learning and early childhood education, while the Ministry of Education is said to insist that it also be used for primary and secondary education, as under the current arrangement.

The ministry's concern is that abolishing the domestic tax linkage could effectively reduce the grant and shrink the funding available for primary and secondary education.

A coalition of 254 education organizations — including the Korean Federation of Teachers' Associations — formed to respond to the grant reform has also argued that the fund should be directed toward primary and secondary education.

With the tug-of-war over the fund's purpose continuing, even the name of the sub-account to be established within the fund has not been finalized.

Earlier, Education Minister Choi Kyo-jin proposed creating a separate "education account" within the fund, and there has been speculation that "talent and education account" is the leading candidate.

"The Ministry of Education hopes the fund can also be used for primary and secondary education, but bridging the gap has not been easy," a government official said. "The question of how the fund is used is tied to other outstanding issues, so a package deal will be needed."

The domestic tax linkage — which allocates 20.79 percent of domestic tax revenue to the grant — appears increasingly likely to be abolished.

The leading proposal would set the following year's grant based on the average nominal growth rate over the preceding three years and the rate of change in the school-age population.

The two ministries initially discussed reflecting 40 percent of the school-age population change rate, but negotiations have gradually shifted toward a 35 percent figure. For the Ministry of Education, the lower rate would reduce the extent to which a shrinking school-age population cuts into the grant compared with the earlier proposal.

Under that formula, next year's grant is estimated at around 80 trillion won — roughly a 5.1 percent increase from this year's supplementary budget figure of 76.4 trillion won — but still nearly 20 trillion won less than the approximately 100 trillion won projected under the current system with no reform.

The 35 percent school-age population weighting, however, has not been finalized as an agreed position between the two ministries.

Amid this, the Ministry of Education is said to have demanded that even if the domestic tax linkage is scrapped, legislation must explicitly guarantee that the grant will be secured at a level equivalent to the current 20.79 percent domestic tax linkage rate.

The Ministry of Planning and Budget, which oversees the country's overall fiscal management, has reportedly rejected that demand, leaving the two sides without a resolution.

"The two ministries are in the process of constructive discussions at the final stage," another government official said.


oskymoon@heraldcorp.com