Don't spend all the semiconductor tax windfall

A broad consensus had emerged that the tax windfall from the semiconductor boom should be used not for immediate cash handouts but to strengthen the Korean economy and prepare for the future. At first glance, the government’s plan for a “Future Response Fund,” announced last week, appears to meet those expectations.

Park Hong-keun, the minister of planning and budget, said that the fund would serve as “a strategic investment platform supporting a rebound in potential growth and a fiscal stabilization mechanism mitigating tax revenue volatility.”

The fund will accumulate additional tax revenue exceeding the average annual growth rate of domestic tax receipts over the past decade, as well as revenue collected above annual government forecasts. Expected to reach 200 trillion won ($144.4 billion), it will focus on four areas: youth, growth engines, regional development and education and human resources.

But the plan raises serious concerns.

First, it risks duplicating existing budget programs. Recent government budgets have invariably included spending ostensibly intended to “prepare for the future.” The four priority areas are already financed through the general account.

Examples cited by the Ministry of Planning and Budget — such as expanding cultural passes for young people, youth housing assistance and a basic income program for rural communities — raise concerns that the government may treat the fund as discretionary money. Funds are particularly problematic because the government can alter 20 to 30 percent of expenditures without National Assembly approval. The Future Response Fund could easily become a government slush fund.

Second, the administration’s ambition to spend the fund heavily during its own term is excessive. Even if the money goes toward necessary projects, can fiscal efficiency really be ensured by pouring hundreds of trillions of won into the economy within two or three years?

The government should preserve substantial resources so future administrations can use them according to circumstances. It needs fiscal self-discipline, perhaps modeled on Norway’s sovereign wealth fund, which preserves its principal and limits withdrawals. Advice that the government should first reduce national debt must not be ignored.

Third, growth is expected to exceed Korea’s potential growth rate next year, as it has this year. But next year’s budget, including the Future Response Fund, is shaping up to be extraordinarily expansionary.

Liquidity is already abundant, contributing to inflation, rising real estate prices and other side effects. If the Bank of Korea raises interest rates while the government simultaneously pumps more money into the economy through fiscal policy, ordinary Koreans will ultimately bear the cost of that policy mismatch.