Huge tax hole
Populistic tax cuts destroy economy, fiscal health
On Monday, the government admitted it could collect 59.1 trillion won ($44.5 billion) less tax than initially estimated this year.
The revised revenue estimate of 341.4 billion won falls 14.8 percent short of the original projection of 400.5 billion won. Both the most significant estimation error and the nearly 60 trillion won revenue gap are unprecedented.
Government budgeters attributed the largest-ever tax hole to a slower-than-expected economic recovery and the dormant real estate market. This is true ― but only to a certain extent. The export slump eroded corporate tax payments, and sluggish property transactions slashed capital gains tax.
Yet, the weak growth and slowing housing market had been expected.
What officials of the Ministry of Economy and Finance did not acknowledge were the harmful effects of tax cuts on the overall economy and fiscal health. The Yoon Suk Yeol administration's tax cuts for the top 1 percent on the income ladder will reduce revenue by 6.2 trillion won this year alone. Only a tiny share of it will be reinvested or spent to bolster the economy.
Even more problematic are the means to plug the hole. Out of the 59 trillion won shortfall, the central government shoulders 36 trillion won while burdening 23 trillion won on local governments and education offices. Only last week, President Yoon declared the "advent of provincial area," and his government is now squeezing their finances. The financial strain on the education sector will worsen teachers' plights.
To solve its budget deficit, the central government will use up to 20 billion won in foreign exchange stabilization funds while forcing ministries and agencies to refrain from spending allocated outlays. Both will cause side effects. Financial officials are confident of defending the exchange rate. However, sparks from unstable international markets can always spill over into Korea to cause another crisis. The spending squeeze has already led to reduced R&D outlays, sharply eroding growth potential.
Most experts call for drawing up an extra budget for revenue correction. Yet, that will be the last thing expected of this government, "obsessed with fiscal health." The problem: tax cuts for big businesses and wealthy individuals will not improve but aggravate the so-called fiscal soundness.
Companies do not invest only because tax rates are low, unless they are tax havens for paper companies. Rich people don't spend money saved from lower taxes but instead save even more. The trickle-down effect is only in books. In Korea now, tax cuts hurt both the economy and fiscal balance.
The Yoon administration's concrete policies show even its fiscal health slogan is in name only.
For instance, it will end tax breaks for only six of the total 71 items supposed to sunset this year. Leaving the other 65 whose purposes have been fulfilled intact is nothing but populism conscious of next May's parliamentary elections. The same can be said about the indefinite extension of the oil tax cut, resulting in a 5.4 trillion won revenue loss to benefit mainly corporate consumers. Mass budgeting for social infrastructure is another election season pork-barreling. Vote-gathering populism and fiscal balance cannot go together.
Most problematically, all this comes when Korea's economy braces for stagflation ― stagnation plus inflation. The nation will likely be mired in the 1 percent range expansion for years. But Korea's public and social spending remained at 14.8 percent of its GDP last year, two-thirds of the OECD average of 21.1 percent and less than half of France's 31.6 percent.
It is natural that the government should prop up the economy through flexible spending in a crisis like now. That's what most advanced countries did during the COVID-19 pandemic. Korea's economy is little better than it was during the pandemic period. But the government is going the opposite direction by tying its hands and feet.
We don't know why, but we presume it is due to the president's neo-liberal economic philosophy.
Yet, nothing is more dangerous than ill-timed convictions. Korea can no longer afford to let politics and ideology ruin the economy and public livelihoods.