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Unprecedented tax revenue reduction leads to gov’t budget deficits

Unprecedented tax revenue reduction leads to gov’t budget deficits

Posted August. 30, 2023 08:31,   

Updated August. 30, 2023 08:31


The government held a cabinet meeting yesterday and approved the budget bill for next year at 656.9 trillion won, up 2.8 percent from this year. It stressed that a “tight budget” saved 23 trillion won by restructuring R&D and subsidy budgets. Still, deficits will be inevitable, with the government issuing government bonds of 61.8 trillion won.

The budget increase for next year will be the smallest since the idea of total expenditure was applied to budget planning in 2005, merely half of last year’s increase at 5.2%. Discretionary spending has been reduced by 20%. Despite belt-tightening efforts, the government will suffer a deficit of 92 trillion won, or 3.9 percent of the country's gross domestic product (GDP). This is due to next year’s tax revenue of 367.4 trillion won, down by more than 8 percent from the target revenue this year. The size exceeds the government's fiscal compliance plan to keep the annual fiscal deficit within 3% of GDP.

The problem is that unlike the government's claim of taking austere measures, rejecting temptations of political spending ahead of the elections, many items are viewed as conscious of the general election, which is only seven months away. Budget invested in social overhead capital (SOC) across the nation, such as railways, roads, and new airports, will increase by 4.6% year-on-year. This is a contrasting trend as the SOC budget declined by 10.7% this year. It is likely to increase further by further political interference in the National Assembly's budget review process.

Following President Yoon Suk Yeol’s promise to increase soldiers’ monthly salary to 2 million won, the monthly salary of sergeants will rise from 1 million won to 1.25 million won this year. Funds given through the Tomorrow Fund, which is allocated separately, will increase from 300,000 won to 400,000 won. The sharp salary raise limited to conscripted soldiers has only left junior and non-commissioned officers unhappy, as their service period is longer and the compensation is less. The government has not responded to opinions pointing out to adjust the rate of increase. Such spending increase will fuel next year's defense budget by 4.5%, exceeding the overall budget increase rate in seven years.

Despite such conditions, the ruling party complains of overly tight budget conditions, claiming it is insufficient to cover election costs. Opposition parties repeat claims to issue supplementary budget within the year. Local governments are also unhappy with the government's policy to cut down on subsidies. As the government’s forecast for better economic conditions in the second half of the year missed expectations, demand for economic stimulus through fiscal spending is rising. Unless the government removes unnecessary political budgets, it will be difficult to defend varying budget demands.