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Looming fiscal cliff to force local govts to delay public projects

Looming fiscal cliff to force local govts to delay public projects

Posted July. 30, 2013 04:54,   

한국어

Local tax revenues collected in this year’s first half by metropolitan and provincial governments nationwide, including Seoul and Ulsan metropolitan cities, and Gyeonggi and South Gyeongsang provinces, declined by 700 billion won (630 million U.S. dollars) from the same period of last year, an analysis showed. Experts have raised concern that the country may face a “fiscal cliff” in which public projects in local regions will be scaled down or outright halted due to the decline in local tax revenue, on top of a sharp drop in national tax revenue collected by the central government.

The Dong-A Ilbo conducted an analysis of tax collections by metropolitan and provincial governments nationwide on Monday. The analysis suggests that the total value of taxes collected in this year’s first half by the 16 metropolitan and provincial governments, excluding Sejong Self-governing City that was launched in July last year, came to 16.3 trillion won (14.7 billion dollars), down 700 billion won (630 million dollars ) year-on-year.

The drastic drop in local tax revenue results from a significant plunge in acquisition taxes that homebuyers pay when purchasing homes due to freezing of the realty market, coupled with a decline in collection of local income taxes that are levied in conjunction with companies’ earnings due to a slump in the manufacturing sector. With no signs of realty market recovery in sight and uncertain economic outlook in this year’s second half, chances are high that the combined local tax revenue will see a decline this year for the first time since 2009 (a drop by 310 billion won or 279 million dollars), when the country was reeling from the global financial crisis.

The Gyeonggi Provincial government, whose realty acquisition tax exceeds half of its overall budget, collected a combined 2.5 trillion won (2.25 billion dollars) through June this year, down about 200 billion won (180 million dollars) from last year’s first half. The ratio of its tax collection relative to the target for this year only amounted to 34 percent, the lowest among the metropolitan and provincial governments nationwide. With its fiscal balance on shaky ground due to a contraction in real estate transactions, the provincial government decided to implement in September a reduction of its extra budget in a move to scale down non-urgent projects requiring expenditures.

The Seoul metropolitan government originally set this year’s tax revenue target at about 12 trillion won (10.8 billion dollars), and was expected to enjoy the soundest fiscal situation in the nation. But it only collected 5.3 trillion won (4.77 billion dollars) in the first half, down 240 billion won (216 million dollars) from the same period of last year. The city government saw a shortfall in tax revenue due to difficulties in collecting local taxes, which is collected as a 10 percent of the corporate tax (collected by the central government). Budget officials at metropolitan and provincial governments say that they saw a significant gap between their local tax revenue targets and actual tax income due to overly optimistic economic outlook they projected when setting their budget plans.

Metropolitan and provincial governments are already poised to face a fiscal cliff. As for the childrearing subsidy program, Seoul is projected to have this budget item almost depleted in as early as end-August. Gyeonggi, Busan and Sejong Self-Governing City will also likely have to halt provision of childrearing subsidies in October or November. Ulsan, a city widely considered to be fiscally better off due to heavy concentration of conglomerates, saw its tax revenue decline 70 billion won (63 million dollars) year-on-year, and is thus considering delaying the groundbreaking of projects including new city libraries or a convention center. South Gyeongsang is facing difficulties paving local roads due to a drop in tax revenue. Road construction work is underway at more than 40 sections of roads, but most projects will inevitably be completed later than the schedules.

“Fiscal independence of metropolitan and provincial governments has deteriorated due to a drop in tax revenues, but they are not in a situation to be able to create new taxes or increase tax rates,” said Kim Jae-jin, a senior researcher at the Korea Institute of Public Finance. “They should focus on finding loopholes in taxation targets by introducing a tax-dodgers management system.”