South Korea's national tax revenue is set to rise sharply next year on the back of a semiconductor boom, but local governments may find their finances tighter rather than easier. The increase in local shared tax revenue is relatively limited, while mandatory spending such as welfare and the local matching burden on central government projects continue to grow, leaving municipalities with less money for their own programs.
Local shared tax revenue in the government's 2027 budget proposal totals 77.1899 trillion won, up 11.3%, or 7.835 trillion won, from this year's initial budget of 69.3549 trillion won, according to the Ministry of the Interior and Safety and the Ministry of Planning and Budget on the 3rd. Over the same period, national tax revenue is projected to climb 49.8%, or 194.2 trillion won, to 584.4 trillion won from 390.2 trillion won. The growth in local grants falls far short of the increase in national tax revenue.
The gap stems largely from a change in how local shared tax will be calculated starting next year. The grant is currently funded by 19.24% of internal taxes, but from next year the amount set aside for a new future response fund will be deducted from internal taxes before the grant is calculated. The government is creating the 162.3 trillion won fund next year using additional tax revenue and other sources, and estimates that local shared tax will be about 30.5 trillion won lower than under the existing formula. Including reductions in education grants, the restructuring of mandatory spending amounts to 69 trillion won.
The concern is that local shared tax is general revenue that municipalities can spend with relative discretion. Unlike state subsidies earmarked for specific purposes, it can be directed to local priorities or a municipality's own projects. With mandatory spending such as welfare costs rising alongside the local matching burden on state-subsidized projects, financially weaker municipalities inevitably have less to spend on their own initiatives.
Some local governments are already scaling back their own projects, citing fiscal strain. Dalseo District in Daegu recently scrapped four large construction projects worth a combined 59.4 billion won. Incheon requested an additional 76 billion won or so in state funding as the government finalized next year's budget proposal, but only about 6.8 billion won was reflected, making it harder to press ahead using local funds alone.
Gyeonggi Province faces a similar situation. Its consolidated fiscal balance has run deficits of more than 1 trillion won every year since 2022, and with revenue conditions deteriorating this year, the province declared a fiscal emergency and began a large-scale restructuring of existing programs.
Behind the pressure lies a structural problem: the share of revenue that municipalities can spend at their own discretion is shrinking. Discretionary revenue accounted for 64.9% of local government revenue this year, down 9.2 percentage points from 74.1% in 2008, according to the Korea Institute of Local Finance. Over the same period, state subsidies grew at an average annual rate of 8.27%, outpacing the 5.68% growth in discretionary revenue. Fiscal self-reliance, measured on a nationwide basis after a revision of revenue categories, also slipped 4.2 percentage points to 42.4% this year from 46.6% in 2016.
To offset the burden on local finances, the government has set up a separate regional account within the future response fund. Of the 162.3 trillion won fund next year, 15.3 trillion won will be allocated to the regional account, including a newly created 3.5 trillion won local future growth support fund. The interior ministry plans to distribute the money to municipalities for use as general revenue.
Local governments say the operation of the regional account matters as much as its size, and that it should guarantee as much local autonomy as possible. "Rather than having the central government uniformly decide which projects the regional account will fund, we plan to propose a bottom-up approach in which regions identify and propose the projects they need," a Busan city official said. "The government should also consider funding projects entirely from the fund without requiring local matching contributions."
Experts warn that the change in the grant formula could hit regions with weaker finances hardest. Curbing growth in a grant designed to bridge fiscal gaps for municipalities that lack their own tax bases could weaken local fiscal autonomy, they say.
"If only central government revenue grows while local revenue shrinks, the central government's authority will ultimately grow stronger," said Joo Man-soo, an economics professor at Hanyang University. "Local governments already have similar mechanisms, such as consolidated fiscal stabilization funds that set aside money when tax revenue exceeds projections, so there needs to be thorough discussion and measures to shore up local finances."
