South Korea should consider limiting the investment function of its future response fund to the next three to five years and then shifting its focus to fiscal stabilization in case of revenue shortfalls, a state-funded research institute said.
The proposal came from Park Jung-heum, an associate research fellow at the Korea Institute of Public Finance, in a report titled "Assessment of the 2027 Budget Proposal and the 2026-2030 National Fiscal Management Plan," published in the October issue of the institute's Fiscal Forum on the 27th.
Park said the fund's two functions — future investment and fiscal stabilization — could come into conflict as they compete for limited resources. Using the money aggressively for project investment would leave less capacity to respond to revenue shortfalls, while concentrating on covering shortfalls would leave too little for investment, Park said.
The tension stems from the difficulty of generating a steady stream of windfall tax revenue, the fund's main resource. Windfall revenue refers to tax collections expected to exceed the long-term growth trend. But as revenue rises, the baseline that defines windfall revenue rises with it. Unless collections keep growing enough to stay above that baseline, it will be hard to secure sufficient resources for both future investment and potential revenue shortfalls.
"While aggressively investing temporary windfall revenue from the semiconductor boom in securing growth engines, one option is to limit this future investment function to the next three to five years and then concentrate on the fiscal stabilization function," Park said.
Alternatively, the government could sustain project investment over the medium to long term while scaling back the degree of response to revenue shortfalls or identifying alternative resources, Park said. Either way, the fund's medium- to long-term operating plan should be clearly established, with detailed rules on accumulation and withdrawal set accordingly.
Park also said the sustainability of the recurring expenditures included in the fund needs review. Programs under the youth account — such as the basic child allowance, childbirth support payments and marriage support payments — have the character of permanent benefits, so their relationship to the principles for selecting future investment projects needs to be clarified, he said. If the fund's resources run short over the medium to long term, financing welfare programs that must continue could become difficult.
"There is a need to establish principles for future investment so that valuable resources are preserved and effective investment takes place, and to overhaul the detailed operating plan so that stabilization mechanisms work according to set rules," Park said.