[The Editors' Verdict] Sound Fiscal Policy Put to the Test Amid Super Tax Cuts

It is an undeniable fact that debt is the root cause of crises. Whether it is households, businesses, or countries, having too much debt inevitably leads to bankruptcy, even if it is ‘good debt’ for investment.

The 1997 International Monetary Fund (IMF) foreign exchange crisis, which caused an economic crisis due to corporate bankruptcies, was ultimately a result of debt taken on for investment. At that time, companies like Hanbo, Jinro, Kia Motors, and the Daewoo Group aggressively increased short-term borrowings for investment but failed to repay them properly, leading to an unprecedented situation where our government had to request bailout funds from the IMF. During the real estate slump from 2012 to 2014, many people who owned homes suffered financial hardship due to loan repayments, leading to a surge in so-called ‘house poor’ households, making household debt a social issue. Although it was just the debt of individual households, the simultaneous emergence of problems among hundreds of thousands of house poor households triggered further declines in housing prices and posed risks threatening the entire financial sector. Since this occurred only a few years after the US subprime crisis that shook global financial markets, fear of the house poor was greater than ever.

What if another form of good debt, national debt, accumulates and explodes? The outcome would be even more dreadful. While the government can proactively manage bankruptcies of households or businesses, there is little it can do when national debt bursts. In this process, ordinary citizens suffer the most severe impact first. Greece is a case in point. A combination of distorted industrial structure, widespread corruption, Eurozone membership, and increased welfare costs led to national bankruptcy, with the increase in populist welfare expenses, disguised as ‘for the people,’ being a major cause. The Greek crisis clearly demonstrated that even advanced countries are not exempt from national bankruptcy. It also prompted countries like the United States, Japan, and the European Union (EU) to re-examine fiscal rules that strictly manage national debt ratios and fiscal deficit ratios below certain levels. Although later than advanced countries, South Korea, whose national debt surged to 1,100 trillion won due to the aftermath of expansionary fiscal policies following the COVID-19 pandemic, has recently embarked on fiscal tightening, aiming to manage the national debt ratio relative to gross domestic product (GDP) in the mid-50% range.

However, looking at the tax law amendment bill centered on a super tax cut worth 13.1 trillion won, one can’t help but feel puzzled. Although the tax cut is intended to curb high inflation and stimulate the sluggish livelihood economy, the tax revenue base that supports sound fiscal policy has weakened. Moreover, this comes after three rounds of high inflation measures that have already implemented tax cuts totaling 10 trillion won. Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho confidently states, "Over time, the reduction in corporate tax burdens will lead to increased investment and growth, which will in turn expand tax revenues," but it is difficult to guarantee when tax revenue will increase. If the tax revenue base is shaken in the medium to short term, warning signs for national finances are inevitable.

Furthermore, once taxes are cut, it is difficult to restore them. If the income tax cut implemented this time is to be reversed, it would likely require a change of government, as the political sphere is reluctant to raise taxes. With inflation continuing in the 6% range, tax cuts may not end with this one instance. In such cases, it is essential to approach tax cuts with clear principles. The national budget must also be thoroughly reviewed again. It is urgent to find budgets that can be reduced through strict verification of lawmakers’ constituency projects and populist welfare programs. Only then can the country’s treasury become healthy.

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