[Editorial] Unchecked spending

By Korea Herald

Decreasing tax revenue calls for keeping ‘aggressive’ fiscal role in check

Published : Aug 28, 2019 - 17:10
Updated : Aug 28, 2019 - 17:10

President Moon Jae-in’s administration has vowed to continue an expansionary fiscal policy in an “aggressive” manner down the road, citing the need to address a series of downside risks facing the country’s economy.

It plans to submit a budget bill worth 513 trillion won ($422.8 billion) for next year to the National Assembly in September, up 44 trillion won or more than 9 percent from this year. The passage of the bill would let the government’s annual spending surpass 500 trillion won for the first time.

In a meeting with a group of ruling party lawmakers this week, Hong Nam-ki, the minister of economy and finance, said, “An aggressive fiscal role is more important than ever before.”

What is concerning is that unchecked fiscal expansion unaccompanied by increased revenues will lead to a rise in national debt.

Korea saw its national tax revenues decrease by 1 trillion won from a year earlier to 156.2 trillion won in the first half of the year. The revenue shortage is expected to widen further with the economy being sagged amid declining exports and sluggish domestic demand.

A research institute here recently estimated that this year’s corporate tax revenue, which accounts for about a quarter of total tax revenues, will undershoot the government target of 79 trillion won by up to 8 trillion won. The shortage is likely to worsen next year, given local companies have been suffering deteriorating profitability. In the first half of the year, 574 firms listed on the country’s main bourse recorded an average on-year decrease of 37 percent in operating profits.

The issuance of state bonds needed to fill the budget deficit would raise the country’s national debt to the upper end of 39 percent of its gross domestic product in 2020, compared to 37.2 percent in 2019.

If the proposed budget for next year is approved by the parliament, fiscal expenditure will have grown by 22 percent, or 113 trillion won, over the three years since Moon took office in 2017. The increase rate is double the pace at which the country’s GDP will have expanded over the cited period.

The Moon administration has expanded welfare benefits and imposed heavier levies on large corporations and affluent individuals.

These measures have resulted in a steep rise in the country’s ratio of tax payments and social security contributions to GDP. South Korea saw the ratio rise by 1.4 percentage points from a year earlier to 26.8 percent last year. It was the steepest on-year increase in a decade.

The figure is still far lower than the average of member states of the Organization for Economic Cooperation and Development, which stood at 34.2 percent in 2017. But it should be noted that Korea has seen the ratio climbing at a far faster pace than other major advanced countries over the past years.

Higher burdens of paying taxes and making social security contributions have sapped the vitality of the private sector.

A slump in consumer spending and business investments dragged down the country’s GDP growth in the second quarter by 0.2 percentage point, compared to a 1.3 percentage point contribution by government spending. A recent analysis by the Korea Chamber of Commerce and Industry showed that the country’s potential growth rate, which refers to the maximum growth an economy could achieve without causing inflation, would drop to 1.2 percent for the period from 2020 to 2024, about half the current level.

It is necessary to channel more fiscal expenditure into bolstering growth potential, which will in turn help widen the tax base. For this, all fiscal programs should be thoroughly examined to overhaul the structure of government spending.

In this regard, questions have been raised about the efficiency and relevance of the proposed budget for next year.

Government officials and ruling party lawmakers have said that an aggressive fiscal expansion is needed to shore up the economy in the face of mounting external risks, including trade tensions between the US and China, Japan’s export curbs on Korea and the possibility of Britain leaving the EU with no deal.

But most of the planned increase in budgetary spending is set to be allocated to finance overlapped welfare programs, infeasible infrastructure projects and temporary jobs creation with the aim of gaining voter support ahead of next year’s general elections.

The upcoming parliamentary deliberation should sift through such reckless spending to prevent the country’s increasingly fragile fiscal soundness from being irrevocably hurt.

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The Korea Herald by Herald Corporation