Korea faces fiscal challenges amid tax income shortfall

The Yoon Suk Yeol administration has been emphasizing the importance of sound fiscal policies, but a sluggish economy has led to a sharp drop in tax collection, sparking concerns that this year’s national tax income will fall by about 60 trillion won ($45 billion) compared to the government’s initial projections.

The underperformance of major corporations including Samsung Electronics due to the semiconductor industry downturn resulted in lower corporate tax revenues. A decrease in real estate transactions was another contributor.

According to sources on Sunday, the Ministry of Economy and Finance is planning to revise tax income targets to reflect the current economic situation and disclose estimates for the actual income deficit. According to the ministry, national tax income for the first seven months of this year amounted to 217.6 trillion won, down 43.4 trillion won from the previous year. Tax collection from January until July stood at 54.3 percent, which is 11.6 percentage points lower than the same period in 2022.

Given the current pace, it is estimated that this year’s revenue shortfall will range from 50 to 60 trillion won. Analysts also predict that the government’s national tax income projection for this year will go down from 400.5 trillion won to 340 trillion won, resulting in a 60 trillion won shortfall. In the budget proposal for national tax revenue presented to the National Assembly on August 1, the ministry projected total national tax income for 2024 to be 367.4 trillion won, down 33 trillion won from the earlier projection for 2023.

Assuming a shortfall of around 60 trillion won in the tax revenue recalculation for this year, it would lead to an error rate of about 15 percent compared to the initial projection of 400.5 trillion won. In 2021 and 2022, there were projection errors of 17.8 percent and 13.3 percent respectively due to excess tax collection. The average error rate for the past 53 years was 5.7 percent and if the 15 percent error rate materializes this year, it would be the first time since the 1988-1990 period that South Korea records double-digit error rates for three consecutive years, reflecting poorly on the government’s fiscal management. The increased government’s tax income error rate also sparked political debate over the accuracy of estimation methods.