Tax collection alone will be insufficient
A federal government overseeing a united peninsula could finance its budget using one or a combination of three different sources: taxation, government bonds, and loans. The North and South could collect taxes according to different schemes. On a predetermined schedule, sectional grants could be administered to federalized areas, which would create both a federal budget and budgets for each separate region.
A federal government would need to fund and maintain the operation of the military and various agencies. It would also need to devote funds to a national welfare system, ensuring balanced development, and dispatch experts across the country to advise and administer policy. In short, the federal budget would need to be very large.
It would prove difficult for South Korea to maintain normal control over its administrative functions and social services if its finances and budget were to suddenly diminish. Thus, there will be a need to balance out distribution to a certain extent, while protecting South Korea’s budget from severe reductions.
There will be resistance from high income earners against a federalized collection scheme. There may also be resistance from the middle class, who don’t want to see a reduction in benefits. Therefore, even if a federal government isn’t instituted, it will be important to nonetheless contribute a large amount of the budget to federal purposes – at least one third of the total budget.
It is impossible to finance all expenses associated with unification, so it will be necessary to resort to seeking loans and going into debt. But as these tools are also limited, a balance will need to be achieved. If debt levels suddenly rise, the sovereign credit rating would decline, representing a burden for the next generation. This is a problem that needs to be carefully considered.
The federal budget will need to include expenses for the military, diplomacy, and the courts. But the biggest expense for the federal budget will be in rebuilding the North. The manner in which the grants are disbursed to the North for rebuilding is an important decision that will affect the nature of unification in both the initial stage and over the long term.
The money could be given to the regional government in the North to be used as it sees fit. But looking at this from the perspective of a federal government, it might be more efficient to plan nationally and provide funds more directly to help foster industry, invest in social overhead capital (SOC), and build new institutions.
It is difficult to determine which method of disbursement would be the most appropriate. The North Korean government may be unable to resolve its significant corruption and bribery issues in the short term.
It may also be the case that local administrators have the most fine tuned sense for the circumstances and conditions on the ground, and can therefore be more efficient with spending. The extent to which the North Korean regional government should maintain autonomy is therefore a matter for further debate.
