Korean gov’t to tighten spending amid concerns over worsening finances

The South Korean government has decided to cut budget spending growth to below 4 percent for next year as fiscal conditions have severely worsened on tax revenue shortage.

According to the Ministry of Economy and Finance on Sunday, the annual tax revenue is projected to reach 356 trillion won ($267 billion) this year under the assumption that taxes in the remaining months of this year will be collected at a similar level of last year.

The amount is more than trillion won short of this year’s revenue budget of 400.5 trillion won.

Tax collection rate in the first six months of this year stands at 44.6 percent, which is less than half of the annual revenue budget.

The shortfall is mainly attributed to the weak economy. The housing market has nearly stalled, leading to a sharp fall in capital gains taxes.

Corporate tax revenue also remains weak due to poor corporate earnings as well as value-added tax revenue on weak domestic demand.

The tax revenue plunge raises a red flag on fiscal balance.

The managed fiscal balance, which considers the government spending on the country’s four main social security programs, came to a deficit of 101.9 trillion won last year. The deficit in the first half of this year, however, already stood at 83 trillion won, far exceeding the government’s annual deficit forecast of 58.2 trillion won.

If the government targets 3 percent spending growth for next year, it will be the lowest since 2.9 percent in 2016 or 3.6 percent in 2017. The growth in government spending stood at 5.1 percent this year, while 9.5 percent in 2019, 9.1 percent in 2020, 8.9 percent in 2021, and 8.9 percent in 2022.