Economy: Neither Fiscal Expansion nor Tax Cuts Will Be Enough

Given the current budget deficit and tax revenue, neither a fiscal expansion proposed by the ruling party nor tax cuts proposed by the opposition party will easily pass.

With the deficit level this year, a fiscal expansion will undermine the budgetary soundness.

The net deficit, which includes costs related to the payment of public debt, will be as much as 19.2 trillion won, flirting with the two highest marks—24.8 trillion won (1998) and 20.4 trillion won (1999)— since the financial crisis of 1997.

A one-time budgetary injection of eight trillion won, which was raised by the government’s borrowing from the Bank of Korea and the issuance of bonds to enliven the economy, has already been exhausted.

The Ministry of Finance and the Economy is mulling an additional budget for new government bonds aimed for more fiscal spending.

A shortfall in tax revenue will make a further tax cut unlikely.

According to the latest data that the National Tax Office submitted to the Finance and Economy Committee at the National Assembly, the national tax revenue excluding tariffs is 53.17 trillion won, or 46.7 percent of the annual national budget of 113.77 trillion won.

The ratio of taxes actually collected against taxes levied is about 49.7 percent, almost 0.3 percent lower than last year.

“Revenue targets have been overachieved in the previous years,” said Finance Minister Lee Hun-jai at a regular press briefing. “However, we have to lower the revenue target for this year or we will be 100-200 billion won shy of the target.”

However, amid the persistent economic recession, the revenue shortfall is projected to rise above 100-200 billion won.

“Given the rapidly increasing role of the government in the economy since the financial crisis, a yearly repeat of additional budgets will likely deteriorate fiscal soundness,” said Shin Seok-ha, researcher at the Korea Development Institute. “A tax cut can’t be a tentative measure for enlivening the economy because it will lead to reduced revenue and because an attempt at restoring the old tax rate will cause conflict.”

Ji-Wan Cha cha@donga.com