[Weekly Review] Rapid Economic Recovery, Real Estate and Stock Booms Lead to Additional KRW 55.1 Trillion in National Taxes Collected by July

[Asia Economy Reporter Joo Sang-don] With a rapid economic recovery and continued boom in the real estate and stock markets, national tax revenue from January to July this year was recorded at 55.1 trillion KRW more than last year. The government's forecast, which confidently predicted a slowdown in asset-related tax revenue growth in the second half of the year, was also off the mark. There are now projections that this year's excess tax revenue could exceed the amount anticipated in the second supplementary budget (31.5 trillion KRW).

According to the September issue of the 'Monthly Fiscal Trends and Issues' published by the Ministry of Economy and Finance on the 9th, cumulative tax revenue up to July reached 356.9 trillion KRW. Of this, national tax revenue totaled 223.7 trillion KRW, an increase of 55.1 trillion KRW compared to the same period last year. In March (Q1), cumulative revenue was 19 trillion KRW higher than the previous year, and the upward trend continued through May, June, and July. However, excluding the base effect of 11.9 trillion KRW caused by last year's tax support, the Ministry explained that national tax revenue from January to July this year increased by 43.2 trillion KRW compared to a year earlier.

By tax category, corporate tax increased by 10.9 trillion KRW and value-added tax (VAT) by 9 trillion KRW, supported by the rapid economic recovery. Income tax rose by 22.4 trillion KRW. Capital gains tax and securities transaction tax also increased by 9.1 trillion KRW and 2.2 trillion KRW respectively, influenced by the boom in asset markets such as real estate and stocks. The Ministry of Economy and Finance stated, "Tax revenue growth continues due to the rapid economic recovery and sustained strength in the asset market," adding, "In particular, VAT collected in the current month increased by as much as 3.8 trillion KRW due to the final VAT filing and payment." July is the month for final VAT filing and payment, covering VAT performance from January to June of this year.

Besides national tax revenue, non-tax revenue (17.8 trillion KRW) also increased by 1.8 trillion KRW year-on-year due to increases in Bank of Korea surplus funds and government investment income. Fund revenue (115.4 trillion KRW) also rose by 19.5 trillion KRW compared to the previous year, driven by returns on social security fund assets and others.

◆"High-priced homes averaging 1.1 billion KRW respond sensitively to interest rate hikes"= The Bank of Korea found that when the base interest rate is raised, high-priced homes with an average price of 1.1 billion KRW show much greater sensitivity to interest rate changes.

The higher the home price, the greater the suppressive effect on price increases caused by base interest rate hikes. However, even if the base interest rate is raised to reduce the rate of home price increases, the upward trend does not break, suggesting that interest rate hikes are not a fundamental solution to controlling home prices.

According to an analysis by the Bank of Korea on the 10th using data from January 2010 to June this year, when the base interest rate is raised by 25 basis points (1bp = 0.01 percentage points), the rate of increase in home prices for the fifth quintile group (average home price 1.1 billion KRW) slows by 1.7 percentage points. The Bank of Korea raised the base interest rate by 0.25 percentage points at the end of last month. If home prices had previously been rising by 10%, a 25bp increase in the base interest rate could reduce the rate of increase to a maximum of 8.3%.

On the other hand, the impact of the base interest rate on the first quintile group (average home price 120 million KRW) was much smaller. Even with the same 25bp increase in the base interest rate, the slowdown in home price growth for the first quintile was only about 0.5 percentage points. The second quintile slowed by 0.7 percentage points, while the third and fourth quintiles slowed by 0.9 and 1.4 percentage points respectively.

◆Half-baked fuel cost linkage system... Political logic fuels KEPCO deficit= According to the '2021-2025 Mid-to-Long-Term Financial Plan' submitted by KEPCO to Rep. Yoon Young-seok of the People Power Party on the 6th, KEPCO's debt is expected to increase by 9.66 trillion KRW this year to 142.1354 trillion KRW from 132.4753 trillion KRW last year. The debt ratio is projected to rise from 187.5% to 216.7% during the same period, and interest expenses are estimated to increase from 1.9954 trillion KRW to 2.0625 trillion KRW, exceeding 2 trillion KRW annually. Operating losses are expected to reach 3.8492 trillion KRW, and the interest coverage ratio is -1.9 times, indicating a rapid deterioration in financial conditions.

KEPCO explained the cause of the operating loss turnaround by stating, "Electricity purchase costs increased due to rising international fuel prices such as crude oil and thermal coal." According to the report, KEPCO revised its average crude oil price forecast for 2021-2022 from an initial 52 USD per barrel based on Dubai crude to 62.5 USD this year. Thermal coal prices were raised from 70.8 USD per ton to 92.4 USD. Although electricity rate hikes were necessary in Q2 and Q3 due to the sharp rise in crude oil prices since the beginning of the year, the government repeatedly blocked electricity rate increases citing inflation control. The burden on KEPCO is expected to increase further in the second half of the year when the effect of rising fuel costs fully materializes.

The rapid reduction in the utilization rate of coal-fired power plants, which are cheap power sources, due to the government's accelerated energy transition policy, is also a factor increasing KEPCO's cost burden. According to KEPCO, the planned average coal power utilization rate for 2021-2024 was lowered from 70% to 55.3% this year. This led to poor performance in KEPCO's power generation subsidiaries in the first half of the year. Namdo Power recorded an operating loss of 12.7 billion KRW in the first half of this year, turning to a deficit compared to the same period last year, while Jungbu Power and Namdong Power posted operating profits of 47.4 billion KRW and 91.5 billion KRW respectively, down 58.9% and 21.9% respectively.

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