🚨 Reserve Funds: Essential Government Financial Management for Emergencies

Today Korean Social News | 2025.07.13

📌 Seoul Districts Running Out of Reserve Funds...Services at Risk Due to Consumer Coupon Costs

💬 Seoul's 25 districts are facing serious financial problems because they have to pay for consumer recovery coupons. Out of the first budget of 1.4909 trillion won, districts must pay about 372.7 billion won (25%). Including the second round, districts will pay about 240 billion won total. Because of this, Nowon District and other districts have run out of reserve funds, putting existing resident services at risk of being stopped. The Nowon District mayor said it feels like "the sky is falling" and asked for help with the financial pressure. Some districts are considering extreme measures like issuing local bonds or using integrated financial funds.

Summary

• Reserve funds are financial resources that governments and local authorities keep ready for emergencies.
• They are essential financial tools for quickly responding to unexpected disasters, economic crises, and policy implementation.
• Proper reserve fund management is key to ensuring financial stability and policy response capability.

1️⃣ Definition

Reserve funds are money that governments and local authorities keep ready for unexpected emergencies or unavoidable financial needs. Simply put, just like individuals keep emergency savings, governments also prepare money for unexpected situations.

Reserve funds are important financial tools that help governments respond quickly by providing money during unplanned situations like natural disasters, economic crises, pandemics, and urgent policy implementation.

💡 Why is this important?

• Can quickly respond to unexpected disasters or crisis situations.
• Can immediately secure funding when emergency policies or public support are needed.
• Ensures flexibility in financial management and increases government policy response capability.
• Provides stability during economic shocks or social crises.

2️⃣ Types and Management of Reserve Funds

📕 Main Types of Reserve Funds

• Reserve funds are mainly divided into two types. The main types are:

  • General reserve funds: Money set aside for unpredictable expenses outside the budget or budget overruns.
  • Special reserve funds: Money set aside for especially urgent needs or expenses outside the budget.
  • Can also be divided into central government reserve funds and local government reserve funds.
  • Some government departments also manage their own reserve funds.

• Reserve fund amounts are set as a certain percentage of the total budget. Main characteristics are:

  • The central government usually sets aside about 1% of the total budget as reserve funds.
  • Local governments set aside different amounts based on local characteristics and financial conditions.
  • During economic crises or years with high disaster risk, reserve fund amounts may be increased.
  • Appropriate amounts are calculated considering past experience and risk factors.

📕 Reserve Fund Usage Procedures and Management

• Strict procedures apply when using reserve funds. Main procedures are:

  • Review of purpose and necessity for using the funds.
  • Application from relevant departments and review by the Ministry of Economy and Finance.
  • Review by the Cabinet and approval by the President.
  • After use, results must be reported to the National Assembly.
  • Local governments often need approval from local councils.

• Reserve funds are used for various purposes. Main areas of use are:

  • Used for natural disaster recovery and emergency relief activities.
  • Used for urgent economic policies during economic crises.
  • Used for pandemic responses like COVID-19.
  • Used for public support and strengthening social safety nets.
  • Also used for national security or diplomatic crisis responses.

Main Challenges in Reserve Fund Management

1. Determining appropriate amounts: Too much causes budget inefficiency, too little reduces response capability
2. Ensuring transparency: Risk of budget misuse if procedures are skipped due to urgency
3. Political neutrality: Need to prevent misuse for elections or political purposes
4. Follow-up management: Evaluation of usage effectiveness and ensuring accountability
5. Securing additional funds: Plans for securing additional resources when reserve funds are depleted

3️⃣ Current Reserve Fund Usage and Recent Cases

✅ Central Government Reserve Fund Usage

• The central government has used reserve funds in various crisis situations. Main examples are:

  • Large amounts of reserve funds were used for initial COVID-19 response in 2020.
  • Reserve funds were used to respond to inflation caused by the Ukraine war in 2022.
  • Reserve funds are continuously used for recovery from natural disasters like typhoons, heavy rains, and forest fires.
  • Reserve funds were also used for emergency support payments to ease economic shocks.
  • In 2025, reserve funds are being used for consumer recovery coupon distribution.

• The scale of reserve fund usage continues to increase. Main characteristics are:

  • The frequency and scale of disasters and economic crises are growing compared to the past.
  • Public expectations for government support are getting higher.
  • The impact of external shocks is growing due to increased global economic connections.
  • New types of crises like pandemics are emerging.

✅ Local Government Reserve Fund Status and Problems

• Local governments are finding it increasingly difficult to manage reserve funds. Current situation:

  • Seoul's 25 districts face reserve fund depletion crisis due to consumer coupon cost-sharing.
  • Nowon District has used up all 18.8 billion won of its reserve funds and cannot pursue additional projects.
  • Gangbuk District, Dobong District, and others are also considering project adjustments due to insufficient reserve funds.
  • Some districts are exploring alternatives like issuing local bonds or using funds.
  • There is need to review the cost-sharing system between the central government, Seoul city, and districts.

• There are structural causes for local government reserve fund problems. Main causes are:

  • Unexpected financial burdens are increasing due to central government policies being passed down to local governments.
  • Districts with weak local tax revenue bases have difficulty securing reserve funds.
  • Reserve fund capacity is decreasing as mandatory expenses like personnel and welfare costs increase.
  • Pressure to use reserve funds is growing as resident demand for projects increases.
  • Sometimes there is insufficient awareness of the importance of reserve funds when making financial plans.

4️⃣ Related Terms

🔎 Supplementary Budget

• A supplementary budget is a budget that modifies and supplements the existing budget.
• A supplementary budget means a new budget created when changes are needed to an already established budget after the fiscal year begins. It is used when unexpected circumstances or urgent financial needs arise that were not anticipated when the original budget was made.
• Main characteristics of supplementary budgets include: First, they are created when urgent policies like disaster recovery, economic stimulus, or public support need to be implemented. Second, they are created to reflect when tax revenue increases or decreases significantly compared to original expectations. Third, they require National Assembly approval, making procedures more complex than reserve funds. Fourth, they can be created several times per year.
• Unlike reserve funds, supplementary budgets take longer because they must go through National Assembly review and approval, but they have the advantage of being able to be created for any necessary amount without size restrictions. They are frequently used for COVID-19 response and economic crisis recovery.

🔎 Fiscal Rules

• Fiscal rules are basic principles and rules for government financial management.
• Fiscal rules are rules or targets that governments set for themselves to manage finances in a sound and sustainable way. They are systems aimed at maintaining fiscal soundness by managing fiscal deficits and national debt below certain levels.
• Main contents of fiscal rules include: First, managing the national debt ratio below a certain percentage of GDP (e.g., 60%). Second, maintaining managed fiscal balance deficits below 3% of GDP. Third, managing fiscal expenditure growth rates in connection with economic growth rates. Fourth, appropriately utilizing the economic adjustment function of fiscal policy.
• Fiscal rules help increase predictability of government financial management and secure market confidence. However, exception clauses are often included to allow flexibility during emergencies like economic crises or disasters. Reserve funds are one important means of securing such flexibility.

🔎 Local Allocation Tax

• Local allocation tax is financial support that the central government provides to local governments.
• Local allocation tax refers to taxes that the state provides to local governments to adjust financial gaps between local governments and support stable operation of local finances. It is distributed using a certain percentage (currently 19.24%) of domestic taxes as the source.
• Main types of local allocation tax include: First, ordinary allocation tax that supports resources needed for general administrative operations. Second, special allocation tax that responds to disaster recovery and special financial needs. Third, real estate allocation tax that provides part of comprehensive real estate tax to relevant regions. Fourth, fire safety allocation tax provided for strengthening fire safety.
• Local allocation tax is one of the major revenue sources for local governments and also plays an important role in securing reserve funds. When allocation tax decreases, local governments' reserve fund capacity also decreases, making additional burdens from central government policies even more difficult.

5️⃣ Frequently Asked Questions (FAQ)

Q: What happens when reserve funds are insufficient?

A: When reserve funds are insufficient, resources can be secured through several methods. First, creating a supplementary budget is the most common way to secure necessary resources. In this case, it takes time because it must go through review and approval by the National Assembly or local councils, but it has the advantage of no size restrictions. Second, there is a method of adjusting existing project budgets for urgent purposes. This is relatively quick but can affect other projects. Third, local governments can secure resources by using funds or issuing local bonds. Fourth, there is also a method of requesting special support from the central government or higher-level institutions. However, it is important to maintain reserve fund amounts at appropriate levels and establish financial plans more carefully to prevent such situations from repeating. Most importantly, it is desirable to use reserve funds only for real emergencies and save during normal times to ensure sufficient capacity.

Q: Can citizens check reserve fund usage status?

A: Yes, reserve fund usage status can be checked through various methods, and the government discloses related information to ensure transparency. First, for the central government, reserve fund usage status can be checked on the Ministry of Economy and Finance website or the Open Fiscal site. Information about main usage purposes, amounts, and approval dates is provided. Second, local governments disclose reserve fund usage details through financial disclosures or budget documents on their respective websites. Third, questions and answers about reserve fund usage also occur during parliamentary audits or local council administrative audits. Fourth, more specific materials can be requested through information disclosure requests. However, some security-sensitive matters or ongoing issues may have limited disclosure. Citizens taking interest in and monitoring reserve fund usage plays an important role in increasing government accountability, so active interest and oversight are needed.