The nation sustained a shortfall in its 2012 tax revenue, the first since 2004 when the nation had to control the damage from a credit card crisis. Tax collections fell short of the target by as much as 2.8 trillion won as consumers, among others, tightened their purse strings, imports declined and the property market tanked.
Moreover, President Lee Myung-bak’s outgoing administration outspent the total revenue for the first time since the government was established in 1948. The amount, 148.4 billion won, was not so large. Nonetheless, it had great implications for the incoming Park Geun-hye administration.
Unlike Lee, each of his recent predecessors had a budget carryover of trillions of won for the incoming administration. In the case of his immediate predecessor, Roh Moo-hyun, the carryover amounted to as much as 16.5 trillion won. This helped him cut taxes.
But no such luxury will be available when the Park administration is inaugurated in two weeks. Worse still, it will probably have a shortfall in the tax revenue this year, because the 2013 tax revenue forecasts by the Lee administration are overblown.
Last year, the Lee administration wrote the 2013 budget bill on the assumption that gross domestic product would grow 4 percent this year. But the assumption had already been discredited by the time the administration submitted its budget bill to the National Assembly in October.
But the 4 percent growth assumption prevailed when the budget bill passed on Jan. 1. As such, the tax revenue will fall short of the target by a ballpark estimate of 2 trillion won. This spells a predicament for Park, who committed herself to spending an additional 135 trillion won on welfare during the next five years of her governance ― an average 27 trillion won each year.
Park tied her own hands when she made a campaign promise not to raise tax rates to finance her welfare commitment. If the Park administration is to make good on her commitment to spend more on welfare, it will have to write up a supplementary budget bill, paving the way for borrowing to make up for the fiscal shortfall. A former budget officer says the state will have to borrow 15 trillion won or more if the growth rate stands at 3 percent or falls below the level this year.
An alternative will be to prioritize her welfare programs and delay those that are not deemed urgent. Or her administration may choose to raise tax rates to an acceptable level. Either way will be unpalatable to Park, but she needs to understand there is no magic wand.
