Ruling party, government hold consultations Tuesday; Interior Ministry briefs on local allocation tax issues

Minister Yun Ho-jung: 'Fiscal situation facing local governments is not easy'

Park Chan-dae, head of governors' council: 'Recovery in tax revenues should reach local governments too'

Democratic Party of Korea leader Kim Min-seok speaks at a ruling party-government consultation on the future response fund held at the National Assembly members' office building Tuesday. The meeting covered local allocation tax reform and the future response fund as they relate to metropolitan and provincial governments. [Yonhap]
Democratic Party of Korea leader Kim Min-seok speaks at a ruling party-government consultation on the future response fund held at the National Assembly members' office building Tuesday. The meeting covered local allocation tax reform and the future response fund as they relate to metropolitan and provincial governments. [Yonhap]

With national tax revenues projected to exceed expectations by more than 50 trillion won ($37 billion) this year, local governments are raising alarm that the central government's push to establish a future response fund could eat into the local allocation tax — a key source of local funding. The ruling Democratic Party of Korea and the government say they will coordinate to protect the local share, making the coming negotiations closely watched.

At the consultation held Tuesday at the National Assembly members' office building, Interior and Safety Minister Yun Ho-jung said local governments are deeply concerned that the fund's design would reduce local allocation tax disbursements below projected levels. "Most government policies are carried out by local governments, so it is necessary for the central and local governments to consult together and align their views," he said.

The Ministry of Interior and Safety channels local allocation tax to local governments, which rely on it as a primary revenue source. Both fear that building up the future response fund will leave them with less allocation tax than they had counted on.

The government proposed a 162.3 trillion won fund last month alongside next year's budget plan. The mechanism would set aside the portion of next year's domestic tax revenue that exceeds the average growth trend of the past decade.

This year's surplus tax revenue is projected to surpass 50 trillion won. The government has yet to decide how much of that to contribute additionally, but some observers say the fund could exceed 200 trillion won depending on the amount committed.

Local allocation tax is normally funded at 19.24 percent of domestic tax revenue, so local governments had expected their share to grow alongside rising tax receipts. But by prioritizing contributions to the future response fund, the government could reduce the amount flowing to local governments by a corresponding margin.

Park Chan-dae, chairman of the Korea Mayors and Governors Association and mayor of Incheon, said at the consultation that local governments have "barely held on by drawing down reserve funds, issuing local bonds and deferring promised projects." He added that responsibilities falling on local governments — in welfare, care services and labor — grow every year. "Now that tax revenues are recovering, I hope that recovery reaches local governments too, so we can fill our empty coffers," he said.

Local governments had already struggled in 2023 and 2024, when large-scale tax shortfalls cut into local allocation tax transfers, forcing them to scale back planned projects or tap their own resources.

Ministry of Planning and Budget Minister Park Hong-keun said the government "deeply sympathizes" with local governments' concerns, which arose as it worked to resolve the structural tension between domestic tax revenue and the allocation tax linked to it. He pledged that support for local governments would not be diminished, citing plans to establish a dedicated local account within the future response fund and expand investment to meet local needs — including a future growth support grant and multipurpose community service centers.

The government plans to determine how much additional surplus revenue to channel into the future response fund once a revised tax revenue estimate is complete. The Interior Ministry said Tuesday it would share with lawmakers the fund's projected impact on local allocation tax and continue coordinating with fiscal authorities.


thlee@heraldcorp.com