“We’d rather tighten our belts than go into debt” … the largest ‘budget blowout’ in a decade likely

Amid concerns that the tax revenue shortfall could reach 30 trillion won this year, there is speculation that the government may pull out its massive budget “spendthrift” card to deal with the tax revenue funk. The reason is that the Yoon administration, which has emphasized sound fiscal management, will choose to tighten its belt rather than take measures such as issuing deficit bonds, which is contrary to its philosophy. Unspent budget refers to spending that is carried over to the next year or not used at all.

There are fears that the tax revenue shortfall could reach 30 trillion won this year as the economy continues to weaken. A man looks at the city center filled with major corporate buildings from Namsan Tower in Seoul. / Yonhap News1

Second half growth forecast to slow

South Korea’s growth rate in 2019 was 2.2 percent, of which 73 percent, or 1.6 percentage points (P), was contributed by the government’s fiscal spending, according to economic authorities on Sept. 21. The government’s contribution was also 1.1 percentage points (P) in 2020, when the country recorded a -0.7 percent growth rate due to the spread of the novel coronavirus infection (COVID-19). This means that without government spending, the contraction would have been much larger. Social overhead capital (SOC) projects funded by the government contribute to the overall economy by creating jobs.

That’s why many economists are keeping a close eye on this year’s fiscal situation. According to the Ministry of Strategy and Finance, national taxes totaled 87.1 trillion won through March. That’s 24 trillion won less than the same period a year ago. Even if the same amount of taxes (284.8 trillion won) are collected in April-December as last year, the government’s 2023 tax revenue will be 37.1 trillion won, 28.6 trillion won short of the government’s 400.5 trillion won revenue budget.

Initially, the government predicted that the economy would be “up and down” this year, with the economy sluggish in the first half of the year and picking up in the second half. Recently, however, doubts have been growing about the latter. On March 11, the Korea Development Institute (KDI), a state-run research organization, lowered its economic growth forecast for the second half of this year by 0.3 percentage points to 2.1% from 2.4%. The Korea Institute of Finance also lowered its second-half growth forecast by 0.2 percentage points to 1.7% from 1.9%.

The Korea Development Institute (KDI), a state-run research organization, lowered its economic growth forecast for the second half of the year to 2.1% from 2.4%. Import and export containers are stacked at a port in Busan on the afternoon of May 1. / Yonhap

Tax Revenue Shortfall Worsens as Economic Slowdown Continues

The delayed economic recovery means that low tax revenues could persist into the second half of the year. Moreover, the ministry has announced that it will spend 65 percent of this year’s 242.9 trillion won ($157.9 billion) in central government spending in the first half of the year to counter the economic downturn. As fiscal spending is concentrated in the first half of the year, the government’s contribution to the economy in the second half is bound to be lower, and if tax inflows continue to fall short of expectations due to the prolonged economic slowdown, the government’s fiscal contribution will fall further.

This can lead to a vicious circle of weak economic recovery in the second half of the year. This is why the “high-low-low” or “high-low-load” scenario is being talked about inside and outside the government. The BOK will release its “May Revised Economic Outlook” at the Monetary Policy Committee meeting on May 25, and will release new forecasts for this year’s gross domestic product (GDP) growth, inflation rate, and current account balance. The BOK has already signaled that it will lower its growth forecast further from 1.6%.

Normally, when the government faces a shortfall in revenues, it issues additional government bonds to finance its budget. However, issuing government bonds is not in line with Yoon’s “sound fiscal” philosophy. It is not a priority. The MOLIT is also negative about the supplementary budget, which involves reducing tax revenues or increasing appropriations. Deputy Prime Minister and Minister of Economy and Finance Chu Kyung-ho has repeatedly rejected the idea of defending growth through debt.

Deputy Prime Minister and Minister of Economy and Finance Chu Kyung-ho attends a briefing on the ‘2023 Budget’ at the Government Complex in Sejong, Seoul, on Aug. 25, 2022. / Ministry of Strategy and Finance

Like 2013-2014…pull out the no-budget card

There are observations inside and outside the government that “the fiscal authorities may mobilize a no-budget approach like in 2013-2014. At that time, the Ministry of Finance told ministry budget officers to “prepare and submit a proposal to reduce appropriations centered on low-priority projects by ministries.” The idea was to make up for the shortfall in tax revenues by carrying over or eliminating non-urgent project costs to the following year메이저사이트.

In 2013, the government took in 201.9 trillion won in tax revenue, 8.5 trillion won short of the revenue budget (210.4 trillion won), and spent 18.1 trillion won. In 2014, tax revenues fell short of the budget by 10.9 trillion won ($205.5 billion), and the government’s deficit grew to 17.5 trillion won. This year’s tax revenue shortfall is expected to reach 30 trillion won, so if the government chooses not to use the money, it will be the largest ever.

Experts advised that the government should refrain from unconditionally reducing budget projects that have been scheduled because of concerns about tax revenue shortfalls. “When the government makes a budget, it also considers the effect of fiscal spending on economic growth,” said Woo Seok-jin, a professor of economics at Myeongji University. “If it is forced to reduce fiscal spending, the growth rate will be negatively affected.”

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