Three Years of Consecutive Tax Revenue Shortfalls... Who Will Fill the Empty State Coffers? [Key Issues for the New Government]

Domestic Economy Worsens Amid Martial Law Aftermath
Experts Debate: "Active Fiscal Policy vs. Fiscal Soundness"

Editor's NoteA new government will begin on June 4. The 21st presidential election is an early election, so the administration will start without a Presidential Transition Committee. This means the new president must take charge of state affairs immediately, without any preparation period for the transfer of power. Since the declaration of martial law on December 3 last year, Korean society has experienced a period of chaos. The presidential election marks the starting point of change. As expectations for the new government are high, so is the pressure. Restoring the dynamism of the Republic of Korea requires resolving the many pressing issues at hand. This series will diagnose, in three parts, the key challenges the new government must tackle.

On the 23rd, candidates are taking a commemorative photo before the 2nd presidential candidate debate for the 21st presidential election hosted by the National Election Broadcasting Debate Commission at the KBS headquarters studio in Yeongdeungpo-gu, Seoul. From the left, Lee Jaemyung of the Democratic Party, Kim Moonsoo of the People Power Party, Lee Junseok of the Reform New Party, and Kwon Youngguk of the Democratic Labor Party presidential candidates. 2025.5.23 Photo by National Assembly Press Photographers Group

After three years under the Yoon Sukyeol administration, the nation's finances have become even more strained. Despite not experiencing a national economic crisis like the International Monetary Fund (IMF) bailout, tax revenue has declined for three consecutive years, raising concerns about the state coffers. Each presidential candidate is presenting election pledges of astronomical scale, but the national treasury to implement these promises is essentially empty. How should the new government manage public finances once it takes office?

According to the political community and fiscal experts on the 28th, South Korea is expected to face a tax revenue shortfall for the third consecutive year in 2025. At the end of last year, the aftermath of martial law rapidly worsened the domestic economy, while the shockwaves from the tariff war initiated by the Trump administration in the United States severely impacted exports. Until now, the political sphere has focused on the so-called tax revenue shortfall, where actual tax collection falls short of the original budget. However, fiscal experts have recently raised concerns that the decline in tax revenue is becoming critical.

Based on the final accounts, tax revenue in 2023 was 344.1 trillion won. This figure was not only 56.4 trillion won less than the budgeted 400.5 trillion won for that year, but also a sharp drop compared to the 395.9 trillion won collected in 2022. This means tax revenue fell by 13.1% in a single year. Last year, tax revenue was 336.5 trillion won, a further 2.3% decrease from 2023. Considering that GDP growth rates were 1.4% in 2023 and 2% in 2024, tax revenue declined even as the economy continued to grow.

According to the Korea Institute of Public Finance, national tax revenue has only decreased since 1990 during major crises: the 1998 financial crisis (known as the foreign exchange crisis), the 2009 global financial crisis, the 2013 credit card crisis, and the 2020 COVID-19 crisis. However, tax revenue is now declining consecutively even though there has been no significant economic crisis and the economy is still growing.

The problem is that the fiscal situation is unlikely to improve easily. Each major presidential candidate has promised a large-scale supplementary budget after taking office, and due to the aftermath of the tariff war, industrial policies focused on supporting strategic industries are also inevitable. In addition, when the new government is launched, the burden of fulfilling campaign pledges will inevitably increase fiscal pressure. For example, according to the data submitted to the Korea Manifesto Center by Lee Jaemyung, the Democratic Party candidate, his national pledges alone amount to over 210 trillion won. If local pledges without disclosed funding sources are added, the bill becomes even larger. Kim Moonsoo of the People Power Party and Lee Junseok of the Reform New Party have not disclosed the scale of their funding due to ongoing estimates or revisions of their pledges, but additional fiscal burdens are unavoidable during the process of implementing their promises.

It is also concerning that the candidates are directly or indirectly proposing tax cuts, even under difficult fiscal conditions with declining tax revenue. Kim Moonsoo has proposed real estate-related tax cuts such as abolishing the comprehensive real estate tax, as well as introducing a price-indexed comprehensive income tax and lowering the maximum corporate tax rate. Lee Junseok has opened the possibility of a corporate tax cut competition by proposing that local governments be given the authority to set the corporate tax rate at 30%. There have also been ongoing predictions that Lee Jaemyung's camp may pursue tax cuts related to income tax and other areas.

There is no disagreement between the ruling and opposition parties on the need for an active fiscal strategy in light of the economic situation. Both Lee Jaemyung and Kim Moonsoo have pledged to immediately formulate a supplementary budget if elected. The priority, they say, is to revive the economy.

Experts believe that an expansionary fiscal policy is inevitable due to the economic situation. Kook Kyungbok, former director of the National Assembly Budget Office, said, "Government finances are not very flexible, as there are not only legally mandated expenditures but also discretionary spending that cannot be easily adjusted. Nevertheless, reviving the economy for ordinary people is the most urgent task. We need to ensure money circulates in the market." He added, "Investment is needed in future growth industries such as artificial intelligence (AI) and robotics. The government should use public finances as a catalyst to attract private capital into funds and investments, while also significantly easing regulations."

Lee Sangmin, senior research fellow at the Korea Institute of Public Finance, also stated, "While fiscal soundness is often discussed, sustainability is even more important. Even if active fiscal management leads to increased debt in the short term, if GDP and other indicators rise and fiscal sustainability improves, it may be a better outcome. We need to explore ways to implement an active fiscal policy." He also emphasized the need for measures to secure tax revenue, saying, "If tax increases are difficult, at the very least, we should review and adjust tax exemptions and reductions."

However, there are still concerns that fiscal soundness must not be neglected. Kim Kwangmook, former chief expert of the National Assembly Special Committee on Budget and Accounts, said, "Looking at the recent downgrades of the U.S. credit rating, it is clear that international credit rating agencies are placing great importance on fiscal deficits." He stressed, "We must determine the direction of fiscal management while carefully monitoring international assessments of fiscal expansion."