The Seoul government said its revenue this year will fall about 12 trillion won ($10.8 billion) short of an earlier estimate due to slowing economic growth, and warned that this could lead to a possible “fiscal cliff” situation similar to that of the U.S. in the second half of this year.

“Drastic government spending cuts amid a prolonged period of low growth and a weak base for economic recovery could cause the economy to crash in the latter half of this year,” top presidential aide for economic affairs Cho Won-dong said in a briefing on Friday.

“If we don’t take backup measures despite the possibility of fiscal spending cuts due to the lack of government revenue, market uncertainties could amplify.”

According to Cho, the Lee Myung-bak administration deliberately overestimated the tax and non-tax revenues hoping to achieve a balanced budget when it was drafting this year’s budget plans late last year.

“The former administration drafted the budget based on a growth forecast of 3.3 percent this year, and later made an official announcement that it expects 3 percent growth, but the budget was passed without revision,” he said.

“The estimated tax revenue should go down by about 6 trillion won if the economy grows only 3 percent. The shortfall will be even bigger, however, since Korea’s growth has slowed even further since the government’s budget plan was submitted.”

The government on Thursday lowered its growth forecast to 2.3 percent this year.

Second Vice Finance Minister Lee Seok-joon also said Friday that the slowing growth will reduce the government’s non-tax revenue by another 6 trillion won from the earlier estimate.

This is why the Park administration is planning a supplementary budget of over 15 trillion won, which is greater than previously projected, Cho said.

To keep the shortfall of government revenue from resulting in a Korean fiscal cliff in the second half, Seoul plans to spend over 60 percent of this year’s expenditure budget in the first half, the senior presidential secretary said.

A fiscal cliff refers to a combination of tax increases and government spending cuts late last year and early this year which the U.S government feared might have a detrimental effect on its already shaky economic recovery.

“The lack of government revenue will worsen as we move into the second half, which means we would have to cut fiscal spending like the U.S. If we don’t fix the situation, there will be a major gap between Koreans’ economic perceptions and policies,” Cho said.

Regarding how to finance the welfare projects pledged by President Park Geun-hye during her campaign, Cho said the government would clearly state how much will be spent and how to secure the funds at a meeting in late April or early May.

“We would have to issue government bonds to make up for the lack of tax revenue, and this would cause the budget deficit to widen,” he said.

“A shortfall of some 12 trillion won in revenue is expected, but we have to discuss with the (ruling) party whether there is a need to reflect all of it when we draft a supplementary budget.”

The government also scrapped its plan to sell its stakes in Korea Development Bank and the Industrial Bank of Korea this year, from which the Lee administration expected some 7.7 trillion won in non-tax revenue.

Vice finance minister Lee said that the government will not sell its stake in KDB because it will be difficult, and continue to hold over a 50 percent stake in IBK. The previous administration had sought to sell its entire 65.1 percent stake in IBK.

Cho also pointed out that the non-tax revenue estimate of 7.7 trillion won from privatization of the two banks was an overstatement especially when nobody was willing to buy them.

By Kim So-hyun (sophie@heraldcorp.com)