[Insight & Opinion]Challenges for the Future Response Fund

100 Trillion Won Fund Powered by Semiconductor Tax Windfall

Securing Competitiveness in New Industries as a Breakthrough for Low Growth

Allocation to Local Governments, Debt Management, and Talent Development Are Key

Recently, the government announced its finalized plan to establish a Future Response Fund worth approximately 100 trillion won and its proposal for reforming local education grants, stating that both will be submitted to the National Assembly. There has been much debate over how to use the excess corporate tax revenue generated by the semiconductor boom, and now the government’s plan has been determined.

The government's proposal to establish the Future Response Fund is significant in that it aims to secure new engines for growth. As new technologies such as artificial intelligence (AI) and electric vehicles are being developed, the world is entering an era of new industrial revolution. With China catching up, Korea’s competitiveness in traditional manufacturing industries such as shipbuilding, steel, and petrochemicals has declined. The Korean economy must invest the increased tax revenue from its semiconductor boom into developing new technologies to secure new growth engines if it is to escape from the current low-growth trap and resolve the youth unemployment problem.

The United States, Japan, and China are also increasing fiscal spending and considering it a matter of utmost importance to secure competitiveness in emerging industries. Even if this may worsen fiscal soundness due to fiscal deficits, these countries believe that the benefits of increasing competitiveness in new industries far outweigh the potential downsides. However, there are also many challenges that must be addressed for the Future Response Fund to succeed.

First, resistance from interest groups must be overcome. When tax revenue increases, the current National Finance Act (Article 90) designates where it must be spent. Approximately 19.24% of tax revenue is allocated to local governments as local grants, and another 20.79% is used for local education support through local education grants. Nearly 40% is distributed to local governments.

In order to establish the Future Response Fund, an amendment to the National Finance Act is needed. The government’s proposal is to determine the allocation of local education grants not by automatically linking them to national tax revenue, but by taking into account the economic growth rate and the number of students. However, this is unlikely to be easy, as it faces opposition from local lawmakers and those in the education sector. The government must devise measures to overcome resistance from these interest groups.

Measures to reduce national debt are also necessary. According to the current National Finance Act, surplus tax revenue, with the exception of local grants, is designated for repayment of public funds and government bonds.

However, if the Future Response Fund is used to support new growth industries and startups by young people, it may not reduce national debt. While surplus tax revenue this year and next year pose no major issue, if the semiconductor market slumps and tax revenue decreases, or if fiscal deficits rise due to low growth and an aging society, national debt may increase substantially. The government must seek solutions to reduce fiscal deficits, for example, by creating a Fiscal Stability Fund. Most advanced countries have created similar funds to accumulate surplus tax revenue and reduce fiscal deficits.

Lastly, government-led investment and asset management must be prevented from becoming inefficient. In order to increase investment returns while securing competitiveness in new industries, most advanced countries do not have the government directly involved in investment decisions. Instead, they adopt industrial policies that support technology development and foster specialized personnel. Direct government intervention in investments can lead to inefficiencies due to political factors. Likewise, the Future Response Fund needs to be managed so it is used for research and development (R&D) of new technologies and the training of specialized personnel.

Thanks to the semiconductor boom, Korea’s current account surplus this year is predicted to exceed 350 billion dollars, about 18% of gross domestic product (GDP). Surplus tax revenue is also estimated to surpass 50 trillion won. However, aside from semiconductors, Korea’s competitiveness in most key industries is steadily weakening due to China’s pursuit, and domestic demand is further stagnating, reducing job opportunities for young people.

For the Korean economy to break out of the low-growth trap and achieve another leap forward, it must find new breakthroughs in developing new technologies and new industries. Now is a critical time for policymakers to proactively craft measures for the Future Response Fund’s success.

Kim Jeongsik, Professor Emeritus of Economics at Yonsei University

This content was produced with the assistance of AI translation services.