[Hot Interview] "30 Trillion Tax Revenue Shortfall Measures Focused More on Indicators Than Finance"

Sangmin Lee, Senior Research Fellow at Nara Salim Research Institute

The government has announced measures to address an estimated tax revenue shortfall of 29.6 trillion won. To fill the gap in the national budget, it plans to utilize so-called 'available resources' from various funds and special accounts, including the Foreign Exchange Equalization Fund, reduce the funds allocated to local governments, and compensate for the shortfall through budget non-execution (not spending the budget). The scale of resources to be utilized from funds and special accounts is estimated to be around 14 to 16 trillion won. The plan includes cutting local allocation tax and grants to local governments by 6.5 trillion won. Although it is explained that this is a 'normal' occurrence, the non-execution of about 7 to 9 trillion won from the originally allocated budget is also included in the measures to address the insufficient national finances. Lee Sang-min, senior research fellow at the National Budget Research Institute and an expert in budget and tax law, criticized the government's measures, saying, "They are more concerned with the 'indicators' of fiscal soundness than with fiscal soundness itself." He also stated that the tax revenue shortfall should be addressed through supplementary budgets, which must go through "the National Assembly's review process," rather than by the government's measures.

What do you see as the biggest problem with the government's tax revenue shortfall measures?

The biggest problem is that market participants will lose trust in the government's Republic of Korea budget. Predictability has drastically decreased. Isn't that what the market hates the most? The government's announcement to use not only the allocation tax confirmed in the main budget but also 'non-execution' means that no one knows whether all the budgets in the budget book will be spent or how much will be arbitrarily underspent. For example, a budget that was supposed to spend 1 billion won might end up underspending 500 million won and spending only 500 million won. Can we trust the government budget under such circumstances?

Choi Sang-mok, Deputy Prime Minister for Economic Affairs and Minister of Economy and Finance, is responding to lawmakers' questions during the audit of the Ministry of Economy and Finance and the Bank of Korea at the Planning and Finance Committee of the National Assembly held on the 29th. Photo by Kim Hyun-min

The local allocation tax and local education finance grants have been cut by 6.5 trillion won.

Fiscal smoothing is important in local finance. When excess tax revenue occurred in 2022, it was immediately distributed, but if it had not been distributed that year, it could have been used to offset the tax revenue shortfall in 2023 or 2024. Similarly, if the tax revenue shortfalls of last year and this year were reflected in next year and the year after (in allocation tax, etc.), the situation of suddenly turning on cold water and then hot water in local finance could have been avoided. Moreover, it is unreasonable not to provide the allocation tax set by the National Assembly without a supplementary budget.

It is said that available resources from the Foreign Exchange Equalization Fund and the Housing and Urban Fund will also be utilized.

The Ministry of Economy and Finance says that the total assets of the Foreign Exchange Equalization Fund exceed 200 trillion won, but liquid assets are more important than total assets. Non-liquid assets cannot be dealt with immediately. However, as of 2022, liquid assets have already decreased from 111 trillion won to 69 trillion won this year, and if about 5 trillion won is further reduced, it will drop to 65 trillion won. No one can answer how appropriate the size of the Foreign Exchange Equalization Fund is. But a sharp decrease can increase anxiety.

How should the tax revenue shortfall issue be resolved?

A supplementary budget must be enacted. A supplementary budget to reduce tax revenue means issuing government bonds. Regarding only the local allocation tax, whether it is reduced this year or next year, the amount of money to be given is the same anyway. The reluctance to issue government bonds this year is not about fiscal soundness but only about the indicators for fiscal soundness. Issuing government bonds this year or next year makes no difference; it is linked to whether the allocation tax is reduced this year or next year. (If government bonds are issued this year to provide the reduced allocation tax) and the reduction is reflected in the allocation tax next year and beyond, the issuance of government bonds in the following years will decrease. If the allocation tax is reduced this year (i.e., government bonds are not issued), government bond issuance will increase in the year after next. Ultimately, government bond issuance remains the same.

The government repeatedly emphasizes fiscal soundness.

Abroad, instead of fiscal soundness, fiscal sustainability is emphasized. For fiscal sustainability, predictability and fiscal smoothing are necessary. If these values collapse, both fiscal soundness and sustainability collapse. (In the medium term) if the amount of government bond issuance remains the same but the effect of fiscal smoothing collapses, predictability and sustainability will collapse. It is regrettable that the government seems to focus only on the amount of government bond issuance. The Foreign Exchange Equalization Fund will eventually be drawn down, but someone has to replenish it. This will also be a burden for the next government.