National Assembly Revises 103 Laws, Ignores Fiscal Deterioration... Tax Revenue to Decrease by 34 Trillion Won and Spending to Increase by 21 Trillion Won Over Next 5 Years

National Assembly Budget Office '2021 4th Quarter Approved Laws Fiscal Impact Review' Report
Annual Average Tax Revenue Decreases by 6.8 Trillion KRW, Expenditure Increases by 4.2 Trillion KRW
"When Passing Bills Involving Government Mandatory Spending, Expenditure Reduction Plans Must Be Simultaneously Prepared Using a 'Pay-Go' Approach"

[Asia Economy Sejong=Reporter Kwon Haeyoung] An analysis revealed that government revenue will decrease by 34 trillion won and expenditures will increase by 21 trillion won over the next five years due to fiscal-related laws passed by the National Assembly in the fourth quarter of last year. With more money going out than coming in, the deterioration of the national finances is as clear as day. The bills passed by the National Assembly included populist laws that worsen fiscal conditions with little policy effect such as cash support, leading to the expectation that tax increases or national debt growth will be inevitable for the next administration.

According to the "Review of Fiscal Requirements of Laws Passed in Q4 2021" report released by the National Assembly Budget Office on the 2nd, among a total of 103 laws passed during this period that cause changes in fiscal revenue and expenditure, 51 laws with estimable impacts were analyzed. It was found that from 2022 to 2026, over five years, tax revenue will decrease by an average of 6.8283 trillion won annually, while expenditures will increase by an average of 4.2357 trillion won annually.

First, due to the amendment of the "Value-Added Tax Act" which gradually raises the rate of converting the national value-added tax to local consumption tax from the previous 21% to 23.7% in 2022 and 25.3% in 2023, tax revenue is estimated to decrease by an average of 4.2295 trillion won annually. The amendment of the "Restriction of Special Taxation Act" that temporarily expands and extends the application period of employment increase tax credits is expected to reduce tax revenue by an average of 1.0674 trillion won annually. Additionally, the extension of the application period for tax credits on new growth and source technology R&D and the introduction of deduction rates for national strategic technology facility investments are expected to reduce tax revenue by an average of 410.2 billion won and 392.8 billion won annually, respectively.

On the other hand, government expenditures are expected to increase as various welfare policies expand. The amendment of the "Child Allowance Act" expands the eligibility for child allowance from under 7 years old to under 8 years old and provides infant allowance support for children under 2 years old raised at home, which is estimated to increase expenditures by an average of 2.0684 trillion won annually. The amendment of the "Framework Act on Low Fertility and Aging Society," which provides 2 million won per newborn as a "First Meeting Use Voucher," is expected to increase expenditures by an average of 500.7 billion won annually. In addition, the extension of the application period for tax reductions on used car acquisition tax and automobile tax is expected to reduce tax revenue by an average of 631.6 billion won annually, and the extension of the application period for acquisition tax and property tax reductions for rental housing landlords is expected to reduce tax revenue by an average of 459.9 billion won annually.

Ultimately, the fiscal-related laws passed in the fourth quarter of last year will result in an annual fiscal burden exceeding 11 trillion won.

The problem is that while there are essential bills such as expanding tax credits for corporate R&D and facility investments to enhance the competitiveness of domestic key industries, many bills that are unlikely to have policy effects such as cash handouts are also included. For example, to increase the birth rate, fundamental measures such as improving childcare and parenting infrastructure, education, and housing policies are needed rather than expanding the child allowance payment age and providing cash support for newborns passed by the National Assembly. Moreover, since the real estate market has sharply cooled since the end of last year, with nationwide housing sales dropping by 45%, related tax revenue is also expected to decrease significantly compared to last year.

To make matters worse, both major party presidential candidates have proposed "generous handout pledges" that require astronomical fiscal expenditures, leaving only increased government spending ahead. Lee Jae-myung, the Democratic Party candidate, stated that 300 trillion won is needed to fulfill his pledges, while Yoon Seok-youl, the People Power Party candidate, said 266 trillion won is required. Since there are limits to expenditure restructuring alone, the government ultimately has no choice but to raise taxes and issue deficit bonds.

The government's fiscal deficit is expected to deepen further. This year, national debt is projected to reach 1,075.7 trillion won, accounting for 50.1% of the Gross Domestic Product (GDP), and the integrated fiscal balance deficit will reach 70.8 trillion won. If the government increases the issuance of deficit bonds, the fiscal deficit this year is expected to exceed 100 trillion won by a wide margin.

Professor Kim Woo-cheol of the Department of Taxation at the University of Seoul emphasized, "When creating policies or passing laws that involve mandatory government spending, expenditure reduction plans must be simultaneously prepared through a 'pay-go' approach. Since this year's fiscal deficit is also expected to exceed 100 trillion won, the next government urgently needs to strengthen fiscal soundness management by combining deficit bond issuance with expenditure restructuring and revenue enhancement."

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