Unprecedented 'Budget Punk'... "Concerns Over Large-Scale Expenditure Cuts"

"Government's Principle to Respond Without Supplementary Budget, Spending Cuts Inevitable"
Adjustment Issues Under Executive Discretion Without Parliamentary Discussion
Excess Tax Revenue to Be Used for Fiscal Spending... Fiscal Discipline Must Be Ensured

As a large-scale 'tax revenue shortfall' is expected this year, concerns have been raised about the side effects of the government’s tight fiscal policy.

Shim Hye-jung, Tax Analysis Officer at the National Assembly Budget Office, said at the 'Tax Revenue Deviation Diagnosis and Countermeasure Policy Issues Forum' held at the National Assembly on the 7th, "This year’s tax revenue collection performance is poor, and the government has decided to respond without an additional supplementary budget (추경), making expenditure cuts inevitable," adding, "It is necessary to critically consider whether a large-scale expenditure cut led by the executive branch is desirable."

About 44 trillion won in tax revenue shortfall is expected this year, the largest ever. Accordingly, the Ministry of Economy and Finance reflected this year’s tax revenue deficit in a budget plan with a tightening stance, which was submitted to the National Assembly on the 1st.

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho is speaking at the ruling party-government meeting on the 2024 budget bill held at the National Assembly on the 23rd. Photo by Hyunmin Kim kimhyun81@

This tax revenue shortfall contrasts with the past two consecutive years of surplus tax revenue following the COVID-19 pandemic. In 2021, about 61.3 trillion won, and in 2022, about 52.6 trillion won more tax revenue was collected than expected. Shim’s analysis of the causes of surplus tax revenue found that large errors occurred in corporate tax, capital gains tax, and securities transaction tax, resulting in higher-than-expected tax revenue. Accordingly, the Moon Jae-in administration expanded fiscal spending by preparing supplementary budgets to support small business owners.

Shim said, "It is analyzed that when surplus tax revenue increases by 1 percentage point, the size of the supplementary budget increases by 0.7 percentage points," adding, "Surplus tax revenue leading to fiscal spending can worsen the fiscal responsiveness to economic cycles." Fiscal responsiveness refers to the function of reducing fiscal spending when the economy unexpectedly improves or overheats, and increasing spending during downturns to moderate economic fluctuations.

However, when fiscal spending increases during good economic times and large-scale spending occurs despite expected tax revenue shortfalls, it risks turning into fiscal policy unrelated to the economic cycle, thereby reducing fiscal stability. Shim pointed out, "Despite the COVID-19 crisis over the past two years, the economy rapidly surged, and surplus tax revenue driven by economic recovery and asset market revival led to increased fiscal spending. Given the reduced fiscal capacity, there are concerns about how expenditure cuts to preserve tax revenue shortfalls will affect economic stabilization."

Park Hong-geun, Acting Leader and Floor Leader of the Democratic Party of Korea, is delivering opening remarks at the first meeting of the Task Force for the Investigation of Excess Tax Revenue and Promotion of Fiscal Reform held at the National Assembly on the 10th. Photo by Yoon Dong-joo doso7@

Shim proposed accurate tax revenue forecasting methods such as ▲ utilizing microdata like financial information and income distribution ▲ developing micro-simulation models for policy effect analysis ▲ monitoring economic fluctuations ▲ and ensuring fiscal discipline.

Ryu Deok-hyun, a professor at Chung-Ang University who participated as a discussant, said, "The timing of tax revenue forecasts needs adjustment," explaining, "Currently, tax revenue forecasts are made in June to July, but there is a significant time gap between the budget approval in December and the start of the fiscal year (January of the following year). If the economic outlook during the year differs from the year-end forecast, errors are already embedded." He added, "There is a high possibility that tax revenue forecasts made before the fiscal year start are significantly inaccurate, and there are few ways to adjust this. The frequency of tax revenue forecasts also needs to be revised to more than once a year."

Lee Kang-gu, a research fellow at the Korea Development Institute (KDI), suggested that when tax revenue shortfalls materialize, the Ministry of Economy and Finance should not only cut expenditures but also make efforts to secure additional tax revenue. He said, "The policy to lower the comprehensive real estate tax fair market value ratio from 80% to 60% in the past should be restored," and "The reduced fuel tax elastic rate should also be normalized." He added, "It is very important to determine whether the tax revenue decrease is due to temporary or structural factors, as this will be a crucial point for future fiscal management," emphasizing the need for flexible and adaptive structural transitions in fiscal operations.

Jeon Byung-mok, senior research fellow at the Korea Institute of Public Finance, said, "While efforts should be made to reduce tax revenue deviations, if unavoidable, it is more important to prepare measures to reduce the error possibility of fiscal policies based on tax revenue," adding, "There is a need to explore ways to improve fiscal responsiveness and reduce deficit bias among the presented issues." He emphasized, "It is important to ensure that fiscal policies appropriate to economic conditions can be implemented despite tax revenue deviations."

Ryu Seong-geol, chairman of the Tax Subcommittee of the National Assembly Planning and Finance Committee, said, "I personally believe that efforts to reduce errors in tax revenue itself must be made to the extent of implementing a 'Tax Revenue Real-Name System,'" and questioned, "There is no content related to the effects of the tax reform or tax law amendment proposals submitted by the government. I don’t know whether it is assumed to be correct or incorrect."

Park Geum-cheol, General Policy Officer for Taxation at the Ministry of Economy and Finance, said, "We forecast tax revenue based on time series regression models, but we check and correct parts that cannot be handled using only macro indicators by tax item," adding, "When conducting the Tax Revenue Estimation Committee, the government does not hold it with only a few insiders with detailed information but also includes private members. We will continue to share as much as possible with the government going forward."

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