"Flood Recovery and Decreased Tax Revenue Considered... High Possibility of 4th Supplementary Budget Formation"

Hana Financial Investment Report
Difficult to Cover Flood Recovery Costs with Contingency Funds
"If Deficit Bonds Issued Are Within 5 Trillion Won, Impact on Bond Market Will Be Limited"

[Asia Economy Reporter Minji Lee] As voices calling for a 4th supplementary budget (추경) have emerged in the political sphere due to flood damage, the possibility of issuing deficit bonds has increased. On the 12th, Hana Financial Investment predicted a high likelihood of a 4th supplementary budget, considering the expanding scale of flood recovery and tax revenue shortfall.

On the same day, the government and ruling party planned to discuss the expansion of special disaster areas and the formation of a supplementary budget during a disaster countermeasure party-government meeting. Earlier, Hong Nam-ki, Minister of Strategy and Finance, argued that contingency funds could be used first and that flood recovery-related finances should be included in next year’s budget, dismissing the possibility of a 4th supplementary budget. However, it was reported that the entire 2.6 trillion won contingency fund cannot be fully used as part of it is needed for COVID-19 related treatment costs, mask support, and employment stabilization.

The increasing scale of tax revenue shortfall since the first quarter is a factor raising the possibility of a 4th supplementary budget, independent of flood damage. Cumulative national tax revenue from January to June decreased by 23.3 trillion won compared to last year, and the month-on-month decrease (2.3 trillion won) has widened.

The extension of the tax payment deadline from the end of May by three months is estimated to have caused a shortfall of 11.3 trillion won in tax revenue. If tax payments are made normally within the extended deadline, the remaining shortfall after excluding 11.3 trillion won from 23.03 trillion won is estimated at 12 trillion won.

Researcher Miseon Lee of Hana Financial Investment diagnosed, “The tax revenue shortfall can be covered by the 14.6 trillion won revenue adjustments secured during the 1st and 3rd supplementary budgets, but considering that many economic agents have found it difficult to pay taxes due to the combined effects of COVID-19 and flood damage, the possibility of tax revenue shortfall cannot be ruled out.”

Ultimately, tax revenue inflow must be active from July to December, but it is difficult to maintain optimism as corporate income tax inflows have decreased due to last year’s economic slowdown. Researcher Miseon Lee explained, “If the trend of tax revenue decline continues, an additional 5 to 6 trillion won decrease in national tax revenue is expected by year-end. If the tax revenue shortfall is not considered in this party-government meeting, further discussions on deficit bond issuance or drastic spending cuts will take place.”

Two scenarios are expected if a 4th supplementary budget is implemented. If the supplementary budget is limited to disaster support at about 3 trillion won, deficit bond issuance is unlikely as it can be covered by fund surplus and expenditure restructuring.

If a supplementary budget of 7 to 10 trillion won is formed considering the possibility of tax revenue shortfall, deficit bond issuance is expected to accompany it. Researcher Miseon Lee said, “In the 3rd supplementary budget, 30% (10 trillion won) of the resources were covered by expenditure restructuring, 67% (23.8 trillion won) by deficit bonds, and the remaining 1.4 trillion won by fund surplus. If the scale of deficit bond issuance is limited to within 5 trillion won this time as well, the supply burden in the bond market will not be significant.”

This content was produced with the assistance of AI translation services.