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(EDITORIAL from Korea Herald on May 27)

All News 07:13 May 27, 2020

Bloated spending
: Tax increase needs to be preceded by restructuring fiscal expenditure

Government officials and a state-run think tank have recently raised the need to increase taxes, reflecting their concerns about the country's mounting fiscal deficit.

In a report released last week, the Korea Development Institute said now is the time to begin debates on tax hikes to increase state revenues.

Vice Finance Minister Kim Yong-beom said earlier this month it is necessary to strengthen efforts toward expanding tax bases. On the heels of the remarks came a suggestion by Kim Sang-jo, the chief presidential secretary for policy, that the issue of tax increase could be addressed through the process of public discussion.

The need for tax increase has been raised on and off in the past. This time, the discourse seems to carry more urgency, as government spending is ballooning at a pace never seen before amid a continuous decline in tax revenues.

On top of the 2020 regular budget set at a record high of 512.3 trillion won ($413.9 billion), the government has implemented two supplementary budgets worth 23.9 trillion won combined so far this year to help cushion the economic impact of the coronavirus outbreak and provide relief funds to all households.

President Moon Jae-in's administration is moving to draw up a third extra budget within the year, which is expected to reach up to 40 trillion won.

In contrast with rising fiscal expenditure, the country's overall tax revenue fell 11 percent on-year to 69.5 trillion won in the first quarter of 2020.

Corporate tax revenue is on a particularly steep downward trend with most companies suffering a plunge in profits due to reduced demand amid the coronavirus crisis.

The Korea Economic Research Institute, a private think tank, recently forecast that levies collected from local firms would decline this year for the first time in six years. Korea's corporate tax revenue rose to 72 trillion won in 2019 from 45 trillion won in 2015. This year, however, the amount is estimated to reach 56.5 trillion won, 12 percent lower than the government's projection of 64.4 trillion won, according to the KERI.

The government is planning to issue state bonds worth more than 100 trillion won this year to help finance the regular budget and additional spending plans.

In the January-March period, the government reported a record quarterly fiscal deficit of 55.3 trillion won, which surpassed the annual deficit of 2019 at 54.4 trillion won.

This bloated budget deficit translates into a spike in national debt.

Korea's national debt is projected to exceed 850 trillion won by the end of this year, accounting for about 45 percent of its gross domestic product -- both figures highest on record.

Officials in the Moon administration and ruling party lawmakers have argued the country still has considerable room to expand fiscal spending.

By any standards, however, it is alarming that the national debt-to-GDP ratio will have increased nearly 8 percent just over a year to the end of 2020.

The estimated ratio for this year is higher than the 39.8 percent the government envisages in its fiscal policy plan for 2019-2023. The plan calls for keeping the ratio at 42.1 percent for 2021 and 44.2 percent for 2022.

With its currency not among key reserve currencies, a rise in the country's debt-to-GDP ratio could result in a downgrading of its sovereign credit rating, which would increase borrowing costs for public entities and private companies as well.

During an annual meeting on fiscal strategy Monday, President Moon dismissed concerns about the country's fiscal soundness, calling for "wartime-like" aggressive fiscal stimulus to cope with the economic fallout from the COVID-19 pandemic.

His emphasis on the need to mobilize all fiscal capabilities is likely to heighten calls for tax hikes to reduce ballooning budgetary deficits.

But it would be difficult to actually raise taxes.

Large corporations and high-income earners, from whom most of levies are collected, could hardly be squeezed into paying more taxes. Increasing taxes from working-class people and raising value-added taxes would be an inconceivable option for the ruling party in the lead-up to the next presidential election in 2022.

It is certainly necessary to increase fiscal spending to cope with difficulties caused by the coronavirus pandemic. But it should also be noted that much of the increased expenditure, implemented or planned, is designed to fund populist programs unrelated to the need to cushion the impact of COVID-19.

Discussion on tax increase should be preceded by more serious efforts to streamline welfare programs and readjust the structure of fiscal spending.


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