[Interview] Lee Sangmin: "Next Year's Budget: The Country Hit the Jackpot, but Its People and Local Governments Are Getting Poorer..."

Interview with Lee Sangmin, Research Fellow at the Nara Salim Research Institute
Nominal growth expected to reach 22% this year, driving a sharp rise in tax revenue
Risk of widening inequality grows amid economic expansion
Urgent need to strengthen local government finances and existing welfare programs
Future investment and debt repayment are both underway

South Korea has hit the jackpot. Tax revenue has surged on the semiconductor boom, and next year’s budget review is underway amid a tax revenue bonanza the country has never experienced before. Who should benefit from the increased fiscal resources, and where and how should they be spent?

Lee Sang-min, a senior research fellow at the Nara Salim Research Institute and a fiscal policy expert, said in a recent interview with The Asia Business Daily about next year’s budget proposal, “The country is getting richer, but its people and local governments are getting poorer.” Lee said, “Nominal economic growth is expected to reach 22% this year,” adding that “about 300 trillion won in additional tax revenue will come in this year and next year.” In other words, the country’s fiscal resources have become more abundant than ever before.

The problem, he said, is that the same is not true for the public. “The problem is not relative deprivation but absolute deprivation,” Lee said. “We are seeing hypergrowth, with the economy expanding while employment declines.” Employment indicators are starkly different from those showing rapid economic growth. In manufacturing, the number of employed people fell by 97,000 through the second quarter, then rose by just 16,000 in September. Lee said wage income growth has also failed to keep pace with inflation, reducing workers’ purchasing power.

The benefits of growth are driving an extreme deepening of inequality.

Prime Minister Han Seongsuk delivers opening remarks at a comprehensive policy hearing on next year's budget, held at the National Assembly on the 4th. 2026.11.04 Photo by Yoon Dongju

Lee said, “The solution is to strengthen existing welfare programs, such as the Basic Livelihood Security Program, the EITC (Earned Income Tax Credit), and integrated care.” Political parties may prefer to introduce new welfare programs, but strengthening existing ones can reduce overlap and exclusion and ease inequality, he said. “Real gross domestic income (GDI), among other indicators, is expected to rise by more than 15% this year. Even taking into account the sharp increase in corporate income, household income is also expected to rise significantly, so a substantial expansion is needed,” he said.

He also expressed concern about local government finances. The government has explored various measures to limit the flow of rising tax revenue into education grants and local allocation taxes. There are significant concerns about measures including amendments to the Local Allocation Tax Act. “Education grants will be calculated by applying the average nominal growth rate over the past three years and the change in the school-age population (weighted at 35%) to the previous year’s amount. Since the nominal growth rate is so high, education authorities’ budgets are also in reasonably good shape,” Lee said. “The biggest problem is local governments.” The local allocation tax is fixed at 19.24% of domestic tax revenue, but its growth rate next year is expected to be only around 2%. He also said that diverting this year’s tax revenue collected above forecasts into the Future Response Fund, rather than distributing it to local governments, would run counter to the Constitution’s provisions on the National Assembly’s budget review authority and the National Finance Act’s principle of gross budgeting.

On how to use the increased tax revenue, the government advocates setting up a Future Response Fund, while the opposition calls for debt repayment. “We need to repay debt, and we also need to spend,” Lee said. He expects the national debt ratio to be around 45%, rather than the 48% forecast by the government for next year, because the economy will grow in size, increasing the denominator, while reduced government bond issuance will lower the numerator. However, he said further debt repayment would not be feasible because of the need to stabilize the bond market.

President Lee Jaemyung delivers an address on the government's 2027 budget proposal in the National Assembly plenary chamber on Nov. 2, 2026. Photo by Yoon Dongju

Lee agreed that a Future Response Fund is needed to stabilize public finances, but said its operating model and the way it funds projects need to change. “It should primarily serve as a major fiscal stabilization mechanism, with a relatively small project-funding role,” he said. “There is no problem with using the Future Response Fund for large-scale infrastructure projects that are completed in a short period, but it should not be used for projects that continue over a long period.” He also identified the transfer of general account programs, such as child allowances, to the fund as a problem.

Here is the full Q&A.

-How much will tax revenue increase?

▲ South Korea has hit the jackpot. (Laughs) Revenue will be about 90 trillion won higher than the original budget this year, and about 200 trillion won higher next year, for a total of roughly 300 trillion won. Even if you add up all the value-added tax paid by nearly every person in the country every day over an entire year, it comes to only 80 trillion won. An additional 300 trillion won coming in this year and next is beyond imagination. The government estimates nominal growth at around 11%, while I, the International Monetary Fund (IMF), and the National Assembly Budget Office put it at around 22%.

-Why are the forecasts so different?

▲ If I interpret it charitably, it comes down to timing. The government bases its budget on information available at the end of July, while the materials on economic policy for the second half of the year were based on forecasts made in May. In May, the nominal economic growth rate for this year was estimated at 11%, but a forecast made in October is inevitably more accurate. However, I would like to share a saying among people who follow the stock market: “A failed forecast can be forgiven, but a failure to respond cannot.” The forecast may have been wrong because it was made in May, but now that the facts are known, the government must respond. I believe next year’s 584 trillion won forecast was also based on the assumption of 11% nominal growth. Applying the changed economic conditions could result in a figure higher than 584 trillion won. During the National Assembly’s budget deliberations in November, the government should conduct a rolling forecast and revise its tax revenue projections for next year. If it fails to respond as well, it will not be forgiven.

-The government says it will manage next year’s increased tax revenue through the Future Response Fund.

▲ The government should not underestimate or overestimate revenue; it should strive to produce the most accurate forecast possible. Of course, forecasts are bound to be wrong. I am not trying to blame anyone for a failed forecast. But the government should offer incentives for accurate forecasts and penalties for inaccurate ones to encourage greater accuracy. “Excess tax revenue” (revenue collected this year above the forecast) and “additional tax revenue” (revenue collected above next year’s budget forecast) mean different things. An increase in tax revenue is good, while excess tax revenue is bad. If an increase in tax revenue is accurately planned and forecast, there will be no excess tax revenue. The fiscal authorities’ role is to make the economy more efficient and increase tax revenue, while accurately forecasting that revenue so that excess tax revenue does not arise.

Minister of Planning and Budget Park Honggeun answers lawmakers' questions during a parliamentary audit of the ministry at the National Assembly on Oct. 8, 2026. Photo by Yoon Dongju

-On how to use the increased tax revenue, the government wants to establish a Future Response Fund, while opposition parties, including the People Power Party, call for repayment of the national debt. Which position is right?

▲ We need to repay debt, and we also need to spend. When more money comes in, we need to do both, and in fact, we are doing both. The government issued 5 trillion won less in government bonds this year, and it also issued less during the supplementary budget process. Those calling for debt repayment say the “absolute amount of debt is increasing,” but what matters is not the absolute amount; it is the debt ratio. Since the COVID-19 pandemic in 2020, the government has always said that “the national debt ratio will exceed 50% next year.” It said the same thing in 2021, 2022, 2025, and 2026, but ended up like the boy who cried wolf. The ratio did not exceed 50% this year, and it will not next year either. The government forecasts around 48% for next year, but my forecast is different. As the economy grows, the denominator increases, while the numerator also falls. (Though it is not widely known,) the Ministry of Finance and Economy is working hard to repay debt. It did not issue the 5 trillion won in bonds it had planned to issue in October, and it will probably issue several trillion won less in November and December as well. By my rough calculation, the ratio will be 45%. In fact, the government is repaying a tremendous amount of debt, just as those calling for debt repayment want.

Calling for even more repayment makes no sense. Government bonds account for 70% of the entire bond market by trading volume. If government bonds are not issued, the bond market will run into problems. An appropriate amount of government bonds needs to be supplied to the market. Think back to when the Gyeongbu Expressway was built in 1970. The debt put pressure on public finances, but it also created an asset: the Gyeongbu Expressway. We need to build a Gyeongbu Expressway for future generations.

-Then what would be the Gyeongbu Expressway of the future?

▲ What matters more to the public is whether spending goes toward Chivas Regal or the Gyeongbu Expressway. That is why I argue that we need to invest in infrastructure. Just as the Gyeongbu Expressway was a successful infrastructure investment, we need to invest in infrastructure today. What kind of infrastructure? Not highways anymore. Instead, I believe we should invest heavily in energy infrastructure. The government and the public want AX (AI transformation) and GX (green transformation), and energy infrastructure can support both. For future generations, energy infrastructure is far better than repaying debt.

Improving energy efficiency is also extremely important. From the perspective of someone who studies public finance, investment in AX is risk-taking. The advantage of risk-taking is high risk, high return; its disadvantage is also high risk, high return. Those managing public finances should also make portfolio investments in areas that do not involve risk-taking. Energy efficiency is an area where the risk approaches zero. Investing 1 trillion won in energy efficiency will reduce future generations’ energy costs by more than 1 trillion won. The 1 trillion won invested in AX could become 100 trillion won or could simply be wasted, but 1 trillion won invested in energy efficiency will definitely save more than 1 trillion won in energy costs. It is a guaranteed benefit for future generations. The current government is taking too many risks, so it should also invest in energy efficiency, where the risk approaches zero, as a complement.

-There are concerns that inequality will deepen as the economy expands rapidly. Some say the government’s response is inadequate. What should be done?

▲ We should strengthen existing welfare programs, such as the Basic Livelihood Security Program, the EITC (Earned Income Tax Credit), and integrated care. Real gross domestic income (GDI), among other indicators, is expected to rise by more than 15% this year. Even taking into account the sharp increase in corporate income, household income is also expected to rise significantly, so a substantial expansion is needed. Creating new welfare programs inevitably leads to overlap and exclusion. We should strengthen these three forms of support.

-Are there any problems with the Future Response Fund?

▲ It is a problem for the Future Response Fund to take on general account programs. The fund should serve to some extent as a fiscal stabilization mechanism and provide funding for necessary areas such as welfare, climate, and women’s issues, but in some cases, programs previously funded through the general account are being transferred to it. Programs such as child allowances are classified as youth-related programs and become Future Response Fund projects. Our analysis found that these kinds of programs account for 23 trillion won of the fund’s 45 trillion won in projects. It should primarily serve as a major fiscal stabilization mechanism, with a relatively small project-funding role. There is no problem with using the fund for large-scale infrastructure projects that are completed in a short period, but it should not be used for projects that continue over a long period.

-There is controversy over local government finances.

▲ Of the 15 trillion won in the local account of the Future Response Fund next year, 10 trillion won has a spending plan, while 5 trillion won does not. This money, which should be allocated to local governments, instead becomes something they have to seek from the central government, putting them in a position where they have to watch what they say. Education grants will be calculated by applying the average nominal growth rate over the past three years and the change in the school-age population (weighted at 35%) to the previous year’s amount. Since the nominal growth rate is so high, education authorities’ budgets are also in reasonably good shape. The biggest problem is local governments. The local allocation tax remains at 19.24%, without being linked to nominal growth, while the government plans to put 100% of excess tax revenue into the Future Response Fund and increase the local allocation tax by only 2%. I think it would be unreasonable to increase the local allocation tax by 40% in line with the 40% increase in domestic tax revenue next year, as current law would require. Local governments need to maintain balanced budgets. Local governments also talk about stabilization funds, but that is highly inefficient. The appropriate approach is to put a suitable amount into the fund and distribute the rest to local governments. Even if a 40% increase is not feasible, increases of 20% or 10% could be considered, yet the plan is to increase it by only 2%. There should have been negotiations over the amount to be distributed, but the decision was made without any such process.

-We were just discussing additional tax revenue, but the allocation of excess tax revenue is also an issue.

▲ There will be excess tax revenue this year as well. If it amounts to 63 trillion won this year, 10 trillion won should be distributed as local allocation tax. But the government’s proposed amendment to the Local Allocation Tax Act excludes transfers to the Future Response Fund from the total amount of net domestic tax revenue, meaning the money will not go to local governments. I believe this also raises constitutional issues. The proposal would make excess tax revenue an exception to the principle of gross budgeting. I oppose it because I consider that an anti-democratic idea. It is also wrong to take more money into the Future Response Fund without settling accounts with local governments based on the amount of excess tax revenue. This effectively rewards inaccurate forecasts: the more excess tax revenue there is, the greater the incentive. I believe a legal amendment that rewards increasingly inaccurate forecasts is problematic.

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