[Editorial] Fiscal expedient

The government forecasts tax revenue to be 29.6 trillion won ($21.4 billion) short this year. The Ministry of Economy and Finance said Monday that it will use 14 to 16 trillion won in three funds to make up for the shortage. The three are: the foreign exchange stabilization fund, the national housing and urban fund and the public capital management fund. It will not issue government bonds.

The government plans to cover the rest of the shortfall by withholding some 6.5 trillion won in national tax subsidies to local governments and local education offices and using 7 to 9 trillion won in budget funds expected to be left unused.

Among the three public funds, the FX stabilization fund will be reduced the most -- up to 6 trillion won.

Last year, the government responded in the same way. The shortfall reached 56.4 trillion won and 19 trillion won in the fund was used.

The government says the country's international reserves are sufficient -- $420 billion at the end of 2023, the world’s ninth largest. South Korea experienced a near-default crisis due to a dollar shortage in 1997 and underwent painful economic restructuring. The Korean currency is weakening toward the 1,400-won level against the US dollar. It seems rash to dip into the fund for the second straight year of this tax revenue problem.

The government will utilize a maximum of 3 trillion won from the national housing and urban fund. This fund was established to support housing welfare projects such as building rental homes and offering home loans to working-class and low-income households. Using the fund this way hurts its users.

It is problematic for the government to manage its finances expediently as if simply paying one card off with another. First of all, the government should have forecast tax revenue more accurately. Its forecasting error was unacceptably wide: 56 trillion won last year and nearly 30 trillion won this year.

Corporate taxes collected for the first three quarters amounted to 23.8 trillion won less than the ministry forecast. This figure was greatly affected by the zero corporate tax on Samsung Electronics and SK hynix for their 2023 performance. They posted operating losses due to semiconductor business downturn. The ministry failed to predict the aftermath of their zero corporate tax properly.

The policy of the Yoon Suk Yeol government to reduce taxes has made things worse. The fuel tax was lowered five times for the past three years from 2021. Without this tax reduction, the ministry estimates it would have collected 13 trillion won more in fuel tax for three years. It is not reasonable to cut the fuel tax as the tax revenue gets depleted. The government also seeks to scrap the financial investment income tax. If that is repealed, the tax revenue is estimated to decrease by 1.5 trillion won annually.

Generous social welfare policies aggravate tax revenue shortfall. Enlisted soldiers‘ salaries and government aid to them were raised, with those for sergeants hiked to 1.65 million won monthly. The basic pension that usually benefits about 70 percent of senior citizens went up to 334,000 won a month. The government plans to raise it to 400,000 won.

The opposition parties go further. The Democratic Party of Korea persistently demands the government to hand out gift vouchers of 250,000 won per person to all citizens under the pretext of supporting their livelihoods and supporting local small businesses. This step will require a total of 12.5 trillion won. The party is also pushing a bill to increase the government's mandatory purchase of rice.

Using special-purpose funds to cover tax revenue shortfall is not a standard method. It is not free, either. It carries interest rates on a similar level as those on government bonds. Eventually, it leads to an increase in government debt.

The Yoon government criticized the previous Moon Jae-in administration for its expansionary fiscal policy and pledged sound fiscal management. Considering that it makes use of a quick fix to cover tax revenue shortfall when national debt keeps growing, it is questionable if the Yoon administration delivers.

Towards the end of the Moon presidency, calls for making strict rules for fiscal soundness got louder. Now they are not heard.