Revised Supplementary Budget Amounts to 5.1 Trillion Won – Next Year’s Budget is 221 Trillion Won

In order to make up for the lost insufficient tax revenues due to the economic slump, a revised supplementary budget of 5.1 trillion won is being created. In addition, Korea’s total government spending for next year is projected to be 221 trillion won, or a 6.5 percent increase from this year.

The government and the Uri Party held a meeting in the National Assembly on September 7 with Uri Party floor leader Chung Sye-kyun and Minister of Planning and Budget Byeon Yang-kyoon and decided on the 2006 government budget and the revised supplementary budget.

Expecting that tax revenues would decrease due to the slumping consumption and the drop in the won-dollar exchange rate (appreciation of won), the government and the ruling party decided to issue 4.1 trillion won worth of government bonds.

Accordingly, an already planned 5.7 trillion won worth of bonds in addition to these bonds will add up to 9.8 trillion won total in government bonds, predicted to be not a small burden to the future fiscal management of the government.

The government and the ruling party also decided to add 700 billion won of comprehensive real estate tax to be collected in December of this year, 300 billion won of surplus taxes from last year, and other revenues as part of the 5.1 trillion won additional budget.

The Ministry of Planning and Budget forecasted that an increase in the GDP of this year by 0.29 percent can be achieved through spending the additional budget.

The ruling party and the government also decided to set the total amount of expenditure next year at 221 trillion won. The total expenditure is the net amount of funds to be spent on the people of Korea, such as general and special accounts funds. Out of these, general accounts are predicted to increase by 8.7 percent and special accounts by 4.1 percent in comparison to this year.

Considering soaring oil prices and the slump in domestic demand, the government and the ruling party expect next year’s total revenues to decrease by 7.8 trillion won from the amount forecasted. In order to make up for it, selling part of the government shares of the Industrial Bank of Korea, which currently the government owns 51 percent, is being discussed.

“Although it will be fiscally difficult next year, we will increase the budgets on R&D, welfare, such as guaranteeing basic livelihood, and defense by 10 to 15 percent,” said Minister Byeon.

Fiscal experts point out that the welfare budget for next year is 54.6 trillion won, a 5.3 trillion won increase from this year’s 49.3 trillion won, or an increase of 11 percent, which is problematic since the rate of increase is too sharp. There are also analyses that with the earned income taxes being lowered by one percent and corporation income tax lowered by two percent, the government will collect less tax revenues than it expects.

Korea Institute of Public Finance Fiscal Analysis Center Chief Park Hyoung-soo pointed out, “With the recovery of domestic consumption delayed and the reduction of earned and corporate income taxes, it is expected that tax revenues will decrease by three trillion won next year. Hence, to have a healthy fiscal year, the National Assembly should refrain from increasing spending in welfare as well as tax cutting.”

Joong-Hyun Park Kang-Myoung Chang sanjuck@donga.com tesomiom@donga.com