In the End, the Disaster Relief Fiscal Policy Became a Patchwork... Income Deduction Fairness Controversy Likely to Continue

"Artificial and Ad Hoc Measures Shake Budget Principles"
"Policy Trust Undermined by Sudden Shift from 70% to 100%"

[Image source=Yonhap News]

[Asia Economy Reporters Kim Hyunjung and Jang Sehee] As the emergency disaster relief fund payment plan in response to the novel coronavirus disease (COVID-19) crisis has been settled on 'payment to all citizens followed by donation-based recovery,' criticism has arisen that the government's fiscal policy has become patchy. This is because the payment plan framework changed due to the ruling party's push during the general election, and it also violated the principle of fiscal policy, which is to draft budgets based on grounded predictions and forecasts. Even considering the urgency of the disaster situation, criticism has been raised that the decision-making process of the 'first disaster relief fund since the founding of the nation' has set a bad precedent.

According to the National Assembly and the Ministry of Economy and Finance on the 24th, the government shifted the target of the emergency disaster relief fund, which was confirmed through the second supplementary budget on the 16th, from households in the bottom 70% income bracket to all households nationwide. The core idea is to pay all households and then recover some funds through voluntary donations, providing donors with an income deduction benefit of about 15% of the donated amount. On the 22nd, the Democratic Party of Korea and the government agreed on this content and began preparing detailed plans.

◆Fiscal Policy Entrusted to 'Goodwill' = The problem lies in the process of reaching this agreement. As is known, the Ministry of Economy and Finance held firm on the '70% payment plan' already submitted to the National Assembly until the last moment, citing fiscal soundness and issues of payment effectiveness and equity. Especially as the ministry responsible for preparing the budget scale for the support fund and the corresponding resource procurement plan, it reportedly expressed disagreement with the ruling party's plan because it is difficult to predict how many citizens will donate and how much with 'goodwill.'

Experts also worry that this support plan could damage the budget management system. Professor Kim Woochul of the Department of Taxation at the University of Seoul said, "The increased amount for the nationwide emergency disaster relief fund is first reflected entirely in the budget, and the unused revenue portion will be used for future measures, which is a makeshift plan," adding, "If handled artificially according to the situation at the time, the budget principles will be shaken." Professor Kim argued, "It politically undermined the foundation of the budget management system." Professor Kim Jungsik of the Department of Economics at Yonsei University also pointed out, "When drafting a budget, revenues and expenditures must be accurate, but this increased fiscal uncertainty," and "The policy credibility also declined as the payment target abruptly shifted from the bottom 70% income bracket to 100%."

Another problem is the lack of principles or standards to induce donations. Lee Taeseok, head of the Public Economics Research Department at the Korea Development Institute (KDI), said, "While social atmosphere can induce donations, it is not a matter to criticize those who do not donate," adding, "It is impossible to know how much revenue will come in from the budget."

[Image source=Yonhap News]

◆Expected to Proceed Without Legal Amendments... Controversy Remains = The National Assembly and the government expect that nationwide payments can be pursued without legal amendments under the newly established criteria. Controversy is anticipated over whether disaster relief funds provided free of charge by the state can be considered income, and whether the 'intention to forgo' unclaimed amounts can be regarded as a donation intention. A government official mentioned Article 24 of the Corporate Tax Act (Non-deductibility of Donations), which states that the value of goods donated free of charge to the state or local governments is considered a statutory donation, explaining, "If regarded as a donation act to the state under the Corporate Tax Act, it is possible." Another Ministry of Economy and Finance official said, "The controversy over donations and income deductions is a matter of legal interpretation."

Confusion is also expected in the process where the support fund is paid per household, but income deduction benefits are provided to some household members. In principle, after expressing the intention not to receive the fund, the donor can decide during year-end tax settlement to whom among the household members the donation will be attributed.

However, if there is no income and no dependents, even if the entire amount is donated, there is no benefit to be received. This is because they are not subject to income tax in the first place. However, if there is a dependent with income, it is possible to attribute the donation to that person. Additionally, if the initial donation amount is large and the legal income deduction limit is fully used, no additional deduction benefits can be received even if the support fund is donated. However, under the Income Tax Act, deductions can be carried forward for up to 10 years.

Meanwhile, the opposition party argues that the government should establish firmer standards before fully discussing these controversies. Kim Jaewon, Policy Committee Chairman of the United Future Party and member of the National Assembly Budget and Accounts Committee, publicly raised questions about doubts surrounding the disaster relief fund and requested the Ministry of Economy and Finance to report by the morning of the 24th.

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