[Editorial] 2025 Budget

The Yoon Suk Yeol administration has revealed its determination to keep a tight budget to “normalize” public spending in the face of a growing tax revenue shortfall, but there are voices that any belt-tightening should be more selective and strategic in a way that benefits the public.

The Finance Ministry on Tuesday announced that the budget for 2025 has been set at 677.4 trillion won ($507.7 billion). The figure marks a 3.2 percent on-year increase, which is higher than 2.8 percent increase for this year's budget. Still, the 2025 budget, in all fairness, illustrates a prudent stance on fiscal policy given the projected nominal economic growth rate of 4.5 percent, a measure of economic growth based on real gross domestic product adjusted for inflation.

The tightening of the fiscal budget is hardly surprising. The Yoon administration has consistently focused on fiscal prudence as opposed to the more generous spending on public welfare of the previous Moon Jae-in administration.

Yoon on Tuesday stressed his administration's intention to cut out what it views as “unnecessary” spending items. “The budget proposal slashed 24 trillion won in government spending by reevaluating the feasibility and effectiveness of all fiscal projects,” he said at a Cabinet meeting where the government's budget was proposed.

Yoon also blamed the Moon administration for the current fiscal problems, citing the national debt, which ballooned by over 500 trillion won to 1,076 trillion won during the 2017-22 period.

Even without Yoon’s critical comment about the preceding administration, the government says it has no other way but to keep the budget tight for next year. The underlying reason is that it is in no position to increase public spending due to the shortage of tax revenue.

Even though total revenues from taxes and social security contributions are expected to shoot up by 6.5 percent to 651.8 trillion won next year, the increase is still less than what is needed to justify spending hikes.

By limiting expenditure growth, the government aims to limit the consolidated fiscal deficit to 25.6 trillion won and the managed fiscal deficit, excluding social security funds, to 77.7 trillion won. Each of the figures are over 10 trillion won lower than this year.

The target fiscal deficit will be around 2.9 percent of GDP. This figure is barely within the 3 percent ceiling under the new fiscal rules that the government is pushing to implement.

If the National Assembly approves the proposal, the government is expected to achieve not only a tight budget for next year but also a rate of 3.9 percent annual growth in the state budget during the first three years of Yoon’s five-year term, marking the lowest rate of state budget growth of all South Korean administrations.

But experts express concerns that the government might not be able to secure the planned tax revenue next year. Last year, for instance, the tax revenue shortfall was 56 trillion won, as the administration introduced tax cuts in real estate transactions and ownership, and Korean companies at large grappled with the economic slowdown and tepid domestic demand, with only a handful of sectors such as semiconductors enjoying strong sales and export.

The tax shortfall is forecast to reach 23 trillion won in 2025, unless the economy rebounds dramatically -- a scenario that is unlikely to play out considering the latest economic trends both at home and abroad.

Critics, meanwhile, argue that the government is now ignoring the need to revive domestic demand through fiscal projects. Their critical view is that the government’s continued policy moves to cut taxes for some sectors should not be used as an excuse to neglect the increase in spending for welfare programs and future-oriented investment.

On Tuesday, Yoon said he would uphold fiscal soundness next year and at the same time allocate budget to welfare projects for vulnerable groups and to spur the growth of the economy. Yoon’s pledge and follow-up actions deserve attention since striking a balance with the budget is no easy task.