National Research Institutes Emphasize "Urgent Fiscal Soundness Issues"... Heading Toward Tax Increase Discussions?

KDI Followed by KIEP Reiterates "Urgent Fiscal Soundness Issues"
"Government Spending Expansion Was Inevitable, but Deterioration in Soundness Raises Concerns Over Long-Term Growth"

[Sejong=Asia Economy Reporter Kim Hyunjung] The Korea Institute for International Economic Policy (KIEP), a government-affiliated national research institute under the Office for Government Policy Coordination, has released its own expert survey results indicating that the most urgent global policy issue currently is 'fiscal soundness.' This statement came just one day after the Korea Development Institute (KDI), another key national research institute, emphasized measures to address the rapid increase in national debt. It is interpreted as a step toward initiating serious discussions on tax increases, which are deemed inevitable to defend the deteriorated fiscal soundness caused by the COVID-19 response.

On the 12th, KIEP held a briefing on the '2021 World Economic Outlook' at the Ministry of Economy and Finance briefing room in the Government Complex Sejong and announced the survey results. The survey was conducted from the 30th of last month to the 5th of this month among 57 economic and regional experts from academia, government and public institutions, private research institutes, and companies secured by the institute. Among the respondents, 35% identified 'fiscal soundness' as the most urgent policy task. This placed fiscal soundness ahead of social structural issues such as the expansion of inequality (19%) and international trade issues like the retreat of globalization (16%). Other urgent issues cited included financial market instability (12%) and inflation (11%).

Experts also selected health and quarantine policies (36%) and government expenditure expansion (35%) as the most effective policies introduced by countries worldwide since the outbreak of COVID-19. Monetary policy and liquidity expansion (19%) and international cooperation (5%) were also mentioned. Summarizing the survey results, respondents generally agreed that government spending was inevitable and effective, but fiscal soundness issues must be addressed going forward. An Seongbae, head of KIEP’s International Macroeconomics and Finance Division, explained, "While expanding government spending at this point is unavoidable to overcome COVID-19, there is concern that the damaged fiscal soundness will hinder long-term economic growth."

In fact, fiscal soundness has rapidly deteriorated as the government actively deployed fiscal measures to respond to COVID-19. According to the monthly fiscal trend report released by the Ministry of Economy and Finance on the 10th, the integrated fiscal balance recorded a deficit of 80.5 trillion won from January to September this year, and the managed fiscal balance deficit, which excludes social security funds and reflects the actual fiscal situation, expanded to 108.4 trillion won. This is nearly double the deficit (57 trillion won) for the same period last year. As of the end of September, the national debt reached a record high of 800.3 trillion won, increasing by more than 100 trillion won compared to the end of last year (699 trillion won). Although September is seasonally a month with lower tax revenue, the biggest factor is the four supplementary budgets executed earlier in response to COVID-19. The government expects the annual managed fiscal balance deficit and national debt to reach 118.6 trillion won and 846.9 trillion won, respectively, this year.

The reason KDI mentioned tax increases along with fiscal soundness issues on the 11th, a day earlier, is related to this. When announcing the economic outlook for the second half of this year, KDI stated, "The rapid increase in national debt poses risks to fiscal soundness and national credit," and "Measures to strongly control the pace of national debt increase should be prepared in advance for the future economic recovery." Jeong Gyucheol, head of KDI’s Economic Outlook Division, responded to a question about securing fiscal resources by saying, "While restructuring expenditures and broadly expanding the tax base are necessary, tax increase measures should also be discussed in the long term."

Although KIEP did not directly mention it in connection with the domestic situation, it reported tax increase movements in various countries through its world economic outlook report. In particular, it forecasted that corporate and personal income taxes would rise in the United States following the election of Democratic candidate Joe Biden as president. Biden, during his candidacy, pledged to impose a 12.4% payroll tax on high-income earners with annual incomes exceeding $400,000 and to raise the corporate tax rate from 21% to 28%. Regarding Japan, which prepared two large-scale supplementary budgets to respond to COVID-19, KIEP diagnosed that "despite efforts to raise the consumption tax rate and curb expenditures, fiscal deficits have significantly expanded due to supplementary budgets, making it uncertain whether the government’s fiscal soundness goals will be achieved."

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