Local allocation tax to fall 30.5 trillion won nationwide, 760 billion won for Daegu alone

Former finance minister under Yoon administration says fund 'runs counter to locally led growth'

Narasallim Research Institute joins criticism, warning of unchecked spending powers and rushed legislation

Daegu Mayor Choo Kyung-ho [Provided by Daegu Metropolitan City]
Daegu Mayor Choo Kyung-ho [Provided by Daegu Metropolitan City]

Daegu Mayor Choo Kyung-ho, who served as deputy prime minister and minister of economy and finance under President Yoon Suk Yeol, has formally come out against the government's 2027 Future Response Fund management plan.

His central objection is that diverting funds earmarked as local allocation tax — money that should flow directly to local governments — into the new fund undermines the fiscal autonomy of local authorities. The Narasallim Research Institute, a private fiscal policy think tank, added its voice to the criticism the same day, releasing a report that identified structural flaws in the fund's design.

"A fund for the future must not steal the future from the regions," Choo said in a statement issued Thursday.

The government announced Tuesday its plan to establish the Future Response Fund at roughly 162 trillion won ($118 billion), drawing on surplus tax revenues that have exceeded the 10-year trend line for domestic taxes. Of that total, 53 trillion won is earmarked for spending across four areas: youth, growth engines, regional development, and education and talent.

Choo said he supports the idea of creating a separate fund in principle but opposes the way it would be financed. "Whether to establish a separate fund is a matter for the central government to decide," he said, "but I am opposed to using, as a source for the Future Response Fund, the portion of increased domestic tax revenue that should be transferred to local governments as local allocation tax."

Nationwide local allocation tax projected to fall 30.5 trillion won; Daegu's share down 760 billion won

According to data attached to Choo's statement, a semiconductor-driven boom in corporate and income taxes is expected to push next year's local allocation tax to around 100 trillion won under the current formula — an increase of roughly 32 trillion won from this year.

Under the government's fund financing plan, however, local allocation tax would fall by about 30.5 trillion won nationwide compared with the current baseline. The fixed-rate portion of local allocation tax would drop from 100.2 trillion won to 69.7 trillion won, while the ordinary local allocation tax would fall from 97.2 trillion won to 67.6 trillion won.

For Daegu, the ordinary local allocation tax is projected to decline from 2.5 trillion won to 1.74 trillion won — a reduction of about 760 billion won — if the fund is established.

"This is a scale that could place a serious burden on local finances already strained by excessive debt," Choo said. He added that non-metropolitan cities and provinces facing fiscal pressure from population decline and a real estate slump would be particularly hard hit, with the cuts likely to force reductions in local projects, a deterioration in essential public services, and additional issuance of local government bonds.

He proposed that funds required under the current Local Allocation Tax Act be distributed to local governments first, with the Future Response Fund drawing only on the remaining increase in domestic tax revenue. He criticized the approach of amending local finance laws to redirect local governments' share into a central fund and then redistribute it through centrally determined projects, calling it "a serious undermining of the spirit of local autonomy and the fiscal independence of local governments."

'15.3 trillion won regional account cannot serve as a fundamental fix'

The government plans to allocate 15.3 trillion won to a regional account within the Future Response Fund to support local projects. Choo drew a clear line, however, saying this cannot be treated as a substitute for the reduction in local allocation tax.

"Unlike local allocation tax, funds distributed through this mechanism are very likely to be allocated according to criteria and priorities set by the central government, and there is a risk they will be concentrated on specific regions or specific purposes," he said. "Each region has a different demographic structure, industrial base, and conditions in education, housing and transportation, with different challenges to address — a system in which the central government sets projects and distributes funds by uniform criteria cannot adequately reflect those differences."

Choo also said the government's approach reflects a fundamental distrust of local governments. "Redirecting into a central government fund the portion of increased domestic tax revenue that should go to local governments as local allocation tax is tantamount to distrusting local governments," he said. He argued the move stems from a mistaken belief that local governments would waste additional funds on populist projects rather than investing in future preparedness, adding that it "runs counter to the government's own policy direction of locally led growth."

Narasallim Research Institute piles on: 'Fund design threatens Assembly's budget oversight'

The Narasallim Research Institute aligned itself with Choo's concerns on the same day.

Son Jong-pil, director of the institute, noted that of the Future Response Fund's projected 2027 revenue of 162.3 trillion won, some 30.5 trillion won in local allocation tax and 32.5 trillion won in local education grants are set to be transferred into the fund as financing sources. He said the transfer of local allocation tax would reduce the ordinary local allocation tax from 31.9 trillion won to 2.3 trillion won, while the regional account's expenditure would amount to only 15.3 trillion won.

"The ordinary local allocation tax is a critically important source of discretionary revenue that local governments themselves designate and use as they see fit," Son said. "Unilaterally transferring it through legislation without the consent of local governments is a policy that undermines local fiscal rights."

Son also took issue with the government's claim that its 2027 budget achieves structural reform savings of 69 trillion won, exceeding its 10 percent target. He pointed out that the figure includes the 30.5 trillion won reduction in local allocation tax, calling it "a measure in which it is hard to find even a minimum of respect for local autonomy — local finances have become a target of structural reform."

The institute also raised concerns about the fund's operational design, separate from the local finance issue.

The Future Response Fund is structured to allow adjustments of up to 30 percent of major expenditure items without requiring National Assembly review of changes to the fund management plan — a higher threshold than the 20 percent limit applied to other non-financial funds. Son said this "leaves a blemish on the consistency and credibility of government policy."

A provision allowing some fund revenue to be managed as off-budget cash — outside the scope of Assembly scrutiny — also drew criticism. Son said it "not only undermines the principle of budget comprehensiveness but also carries a significant risk of infringing on the National Assembly's budget review authority."

The institute further noted that many of the fund's projects are simply transfers of existing budget and fund programs, and that the fund overlaps with existing special accounts and funds including the Special Account for Semiconductor Industry Competitiveness, the Advanced Strategic Industries Fund, and the Regional Extinction Response Fund. It also flagged a procedural concern: the legislative notice period was only five days — from Aug. 24 to Aug. 28 — far short of the legally required 40 days.

'Disclose fiscal impact on each local government and reconsider the plan'

Choo called on the government to transparently disclose the fiscal impact of the Future Response Fund on each local government and to gather input from provincial and city governors before reconsidering the fund's management framework.

"Preparing for the future is a national task that requires the central and local governments to pool their wisdom as equal partners," he said. "I strongly urge the government to transparently disclose the impact of the Future Response Fund on the finances of each local government compared with the current baseline, to fully incorporate the voices of local governments including provincial and city governors, and to reconsider a management framework that allows for mutual benefit."

The Narasallim Research Institute similarly called for a ground-up review of provisions related to local allocation tax, the deletion of special clauses that limit the National Assembly's budget review authority, a fresh legislative notice period to gather stakeholder input, and a redesign of the Future Response Fund as an account-type fund rather than a project-based one.


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