This photo, taken July 16, 2024, shows an empty store in Myeongdong in downtown Seoul. (Image courtesy of Yonhap)
SEOUL, Aug. 27 (Korea Bizwire) — The government’s proposal of maintaining a tight budget in 2025 illustrated its commitment to fiscal policy normalization amid the tax revenue shortfall, but calls for greater fiscal policy roles have also grown in the face of weak domestic demand and longer-term growth momentum, experts said Tuesday.
The finance ministry proposed a 3.2 percent on-year increase in next year’s budget to 677.4 trillion won (US$509.71 billion). Last year, it proposed 2.8 percent budget growth for 2024, the smallest level since 2005.
If the National Assembly approves the proposal, the annual growth rate of the state budget will come to 3.9 percent during the first three years of President Yoon Suk Yeol’s five-year term, and it would mark the lowest level for any administration ever. The comparable figure for the preceding Moon Jae-in government came to 8.6 percent.
The Yoon government has been pushing for belt-tightening measures in a shift from years of expansionary fiscal spending due to the falling tax revenue, inflation and the need to ensure longer-term financial sustainability, among other issues.
“The government initially planned to increase next year’s spending by 4.2 percent, but we’ve decided to focus more on bolstering financial soundness and to maintain tight fiscal policy,” senior finance ministry official Yoo Byung-seo said.
During the first half of this year, the country’s tax revenue fell 5.6 percent on-year, or 10 trillion won, to come to 168.6 trillion won due mainly to the dwindling corporate taxes collected.
In 2023, the total revenue fell 77 trillion won on-year to 497 trillion won amid poor corporate performances and the property market slump.
“We had a massive tax revenue shortfall last year and this year’s condition is still not quite good because of economic difficulties over the past couple of years,” Finance Minister Choi Sang-mok told a press briefing. “But we expect things to get better next year.”
Tight fiscal policy is needed to slow the further build-up in public debt while supporting monetary policy in curbing inflation, according to experts and major economic institutions.
The combined debt of the South Korean government and households has surged past 3 quadrillion won for the first time. (Image courtesy of Yonhap)
The debt-to-GDP ratio is forecast to rise to 48.3 percent from 47.4 percent.
The government has stressed that an increase in the fiscal deficit and the state debt could pose a threat to the country’s sovereign ratings, and ensuring longer-term fiscal health is crucial given low productivity growth and other challenges from demographic changes.
It aims to manage the yearly growth of fiscal spending at an average of 3.6 percent between 2024 and 2028.
But others call for fiscal accommodation given weak domestic demand amid high inflation and high interest rates, which has limited the export-driven recovery.
“Private consumption remains sluggish and rising prices have eroded real income. Most institutions forecast next year’s economic growth to slow down,” Ha Joon-kyung, a professor at Seoul’s Hanyang University, said.
“It is very difficult to boost domestic demand while tightening fiscal policy,” he added.
Last week, the Bank of Korea (BOK) cut the growth projection for South Korea this year to 2.4 percent from its earlier outlook of a 2.5 percent expansion, citing sagging private consumption and investment.
The BOK projected the South Korean economy to grow 2.1 percent next year.
Amid the need to pursue budget restraint, the ministry said policy priority will be on expanding welfare spending and finding new growth momentum while addressing challenges from the low birthrate and population aging and seeking structural reform.
“The primary role of public finances is supporting the vulnerable class in society. Our focus is also on how to trim unnecessary expenditures by redefining roles of the government and the market,” Choi said.
But critics say next year’s budget for efforts to boost the fertility rate is far from enough, and the government failed to present new budget plans that would support the goals.
The government decided to raise next year’s welfare spending by 4.8 percent, but it marked the second lowest level ever. This year’s growth rate of welfare spending stood at 7.5 percent.
“Despite the massive revenue shortfall, the government continues to push for tax cut schemes. It needs to seek ways of expanding tax revenue and to have longer-term perspectives, rather than focusing on achieving short-term fiscal goals,” Kim Gwang-seok, a researcher at the Institute for Korean Economy and Industry, said.
(Yonhap)
