This Year’s Tax Revenue Shortfall Hits Record 59 Trillion Won... "Using Surplus Funds to Put Out the Fire"

Government Announces Tax Revenue Re-estimation Results
17.3% Shortfall Compared to This Year's Budget
Record-High Tax Revenue Deficit
Plan to Utilize Regular Unused Funds Including Reserves

The government projected that the scale of tax revenue shortfall will reach a record high of 59 trillion won by the end of this year. The government plans to actively respond to economic fluctuations by utilizing surplus funds such as the World Surplus Fund and the Foreign Exchange Stabilization Fund (FESF) to ensure smooth fiscal execution. It also intends to strengthen cooperation with international organizations and the National Assembly to improve the accuracy of future tax revenue forecasts.

On the 18th, the Ministry of Economy and Finance announced in a briefing titled "2023 Tax Revenue Re-estimation Results and Fiscal Response Direction" that this year’s national tax revenue is expected to be around 341.4 trillion won, which is 59.1 trillion won less than the budgeted 400.5 trillion won. The resulting tax revenue error rate is -17.3%, the largest ever recorded based on years with deficits.

By major tax categories, income tax, corporate tax, and value-added tax (VAT) are all expected to decrease compared to the previous year. The income tax forecast for this year is 114.2 trillion won, a 13.4% decrease from the budget. The government analyzed that the decline was widened by the sluggish capital gains tax due to the asset market downturn. Corporate tax is also expected to fall by 24.2% from the budgeted 105 trillion won to 79.6 trillion won, influenced by last year’s decline in corporate performance, and VAT is projected to decrease by 11.2% to 73.9 trillion won.

The sharp decline in national tax revenue this year is attributed to the rapidly deteriorating domestic and international economic conditions from the fourth quarter of last year through the first half of this year. Not only corporate operating profits but also the asset market contracted due to steep interest rate hikes, leading to reductions in capital gains tax and inheritance and gift taxes. In particular, corporate tax revenue plummeted significantly due to export sluggishness caused by the semiconductor industry downturn.

The government plans to respond by mobilizing resources such as the 4 trillion won scale World Surplus Fund and the 24 trillion won scale FESF. It is also considering measures to forfeit projects that are difficult to execute within the year. Kim Dong-il, Director of the Budget Office at the Ministry of Economy and Finance, explained, "Following the Cabinet meeting resolution in April, 2.8 trillion won out of the 6 trillion won net World Surplus Fund can be used as revenue in the general account," adding, "There is also room to utilize about 1 trillion won of the World Surplus Fund in special accounts."

Some express concerns that the large tax revenue error could weaken the government’s ability to respond to economic fluctuations. Economic response refers to minimizing fiscal input during good economic times to prevent overheating and increasing fiscal input during recessions to promote growth. However, the government emphasized that since it maintains the expected expenditures for this year, the tax revenue shortfall does not weaken economic response. Yoon In-dae, Director of the Economic Policy Bureau at the Ministry of Economy and Finance, explained, “According to the fiscal stabilization policy, when economic fluctuations occur, expenditure levels are maintained to compensate,” adding, “Although tax revenue decreased by 59 trillion won, using surplus fund resources or revenue utilization helps to supplement the economy.”

Transparency and efficiency in fiscal management are expected to inevitably decline. Even if there is no reduction in expenditures to compensate for the tax revenue shortfall or additional issuance of government bonds through supplementary budgets, internal cuts or expenditure efficiency improvements will be unavoidable. Budget execution should proceed as deliberated and approved by the legislature, but if the tax revenue error grows, there is a side effect of increasing discretionary budget execution by the executive branch.

The government has initiated measures to improve the accuracy of tax revenue forecasts. It will improve the operation method of the Public-Private Joint Tax Revenue Estimation Committee, which was announced as a tax revenue measure last year. Until now, the committee included the Director of the Tax Policy Bureau and four directors, but there was much criticism that statistical expert institutions were excluded and only collection agencies were involved. The Ministry of Economy and Finance plans to significantly expand domestic expert participation and develop estimation models by tax category. It will also strengthen cooperation with the International Monetary Fund (IMF), the Organisation for Economic Co-operation and Development (OECD), and the National Assembly Budget Office through technical consultations and reviews of overseas cases.

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