[Yoo Choon-sik] Unanswered questions on Future Response Fund

As the global boom in artificial intelligence drove unexpectedly sharp increases in South Korean semiconductor manufacturers’ earnings and tax payments, the government decided to set aside the tax windfall for a new fund rather than incorporate it into the existing budget.

When introducing the Future Response Fund last July, President Lee Jae Myung said, “We will concentrate investment in four areas that will determine the nation’s future, namely the future, young people, regional development and education, and thereby raise the economy’s growth potential so that all citizens can share in the gains.”

When announcing its proposed budget for 2027 in early September, the government said it would draw on 162.3 trillion won ($121 billion) in tax revenue above the trend line for the preceding 10 years to invest 45.4 trillion won in four areas central to raising potential growth: young people, growth engines, regional development, and education and talent development.

It also said it would use 12.5 trillion won to reduce new government bond issuance, bringing national debt below the level envisaged in its existing plan. But it is a serious problem that an idea has become an enormous, unconventional fiscal mechanism potentially exceeding 200 trillion won without undergoing serious, open deliberation involving a broad range of experts.

The current semiconductor supercycle will eventually give way to a painful downturn. While the prevailing expectation is that this reversal will not occur within the next few months, that hardly amounts to a consensus that it will never come this time.

One frequently cited argument is that when a certain Nordic country developed oil fields and began producing substantial quantities of crude, it used the proceeds to establish and manage a sovereign wealth fund separate from its conventional fiscal accounts, suggesting that creating and operating the Future Response Fund is neither particularly unusual nor especially problematic.

But it is a strained comparison to equate oil production lasting at least several decades after successful field development with a temporary surge in tax payments generated by a cyclical boom in the semiconductor industry that will end within a few years.

With the semiconductor supercycle coincidentally beginning just as he took office, did Lee assume that it would not give way to a severe downturn during his presidency?

It is difficult to accept that the Future Response Fund was established only a few months after the idea emerged and is being allocated around 200 trillion won without its long-term management plans or measures for addressing potential problems having been settled through public debate.

With the government failing to respond promptly and adequately enough to ease these concerns, the National Assembly Research Service published a report identifying problems with the fund.

The report first pointed out that no mechanism had been established to allow the Assembly and outside experts to examine the money transferred into the fund or assess whether that amount had been calculated appropriately.

It went on to warn that if the fiscal authorities used the fund to carry out projects directly, their responsibilities could overlap with those of the ministries already responsible for those projects, resulting in inefficient resource allocation. Even if those responsibilities were successfully coordinated, concentrating project-related authority in the fund’s managing body could limit the discretion of the ministries implementing the projects, it added.

According to the report, a more fundamental problem is that neither the use of excess tax revenue nor the coverage of revenue shortfalls can reasonably be considered so urgent that there is insufficient time for prior parliamentary scrutiny.

Moreover, accepting it as an exceptional mechanism would effectively allow the government to draw up supplementary budgets whenever it chose, at its own discretion, without going through the National Assembly.

Credit rating agency Fitch Ratings warned in a recent report that the concentration of revenue gains in a narrow range of sectors highlights the risk that the improvement in fiscal outcomes could prove temporary.

Another potential concern is that the Future Response Fund is being pursued separately from existing plans to establish another large fund, the National Growth Fund.

Strictly speaking, the two mechanisms are entirely different in nature, but together they would allow the government to invest hundreds of trillions of won at its discretion in projects requiring commitments beyond a single year, through decision-making structures that are not sufficiently open to the public.

The Lee administration may have designed these policies on the assumption that the ruling party would retain its parliamentary majority after the 2028 general election, but if that assumption proves wrong, or if the semiconductor cycle turns downward soon, complex problems could emerge simultaneously and throw both the political system and the national economy into turmoil.

Even if the Lee administration is fortunate enough to avoid such developments during its term, other problems remain.

The world’s major economies are currently under pressure to respond to rising inflation driven by wars in several regions and massive AI-related investment. The Bank of Korea has already raised its policy rate at two consecutive meetings, while the US Federal Reserve has also begun a cycle of policy rate increases.

Other major central banks are also tightening monetary policy, including the Bank of Japan, which maintained exceptionally low interest rates for longer than its peers but has now raised its policy rate to its highest level in decades.

Against this backdrop, the South Korean government’s plan to manage a separate pool of hundreds of trillions of won, while also increasing regular budget spending at a double-digit rate, is difficult to justify on logical grounds.

Even now, the government would do well to establish the Future Response Fund, or an equivalent mechanism, only after a more transparent and impartial debate that takes a longer-term view. If that is not possible, it could substantially reduce the fund’s proposed size and build experience in managing it.

Yoo Choon-sik

Yoo Choon-sik is a senior AI correspondent covering Korea for MLex Market Insight. He has worked for international media organizations for about 30 years, including as Reuters’ chief economics correspondent in Korea. The views expressed here are the writer’s own. — Ed.