July 6, 2023
SEOUL – “Even if we lose the elections, we must push for fiscal soundness,” said President Yoon Suk Yeol while presiding over a national financial strategy meeting with government and ruling party officials on June 28.
“The amount of budget cut should be used as a yardstick to assess how innovative ministries are.”
Yoon’s remarks can be interpreted as a sign that he is fully committed to tightening the country’s fiscal belt, even though trimming and pruning some nonessential yet popular projects may cost his party votes in the legislative election next year.
Given the dire state of the government’s finances, Yoon’s strong words may sound understandable. What followed, however, appeared strange, if not outrageous. The Ministry of Economy and Finance, perhaps taking Yoon’s demand too faithfully, ordered all ministries to resubmit their 2024 budget plans by Monday — or with three days’ notice.
The ministry’s hasty order means that all major agencies of the government, which already submitted their detailed budget plans for next year by May 31, had to review their spending plans again to reduce spending under the extremely tight schedule.
Since overhauling ministry-level budget plans in such a short period of time is virtually impossible, the resubmitted plans are likely to focus on easy targets for budget cuts, such as state subsidies and cash-based support projects.
Belt-tightening by state organizations is often necessary to enhance fiscal soundness, but it does not mean policymakers can hold a shoddy slash-the-budget contest, without carefully evaluating each state project’s value.
Fortunately, there are opportunities to fix errors and restore some high-value projects back in the budget. The government should make efforts to sort out truly valuable projects worth taxpayers’ money by late August or early September, when the state budget proposal will be finalized.
Of course, the government has to get rid of as many superfluous or overlapping projects as possible in consideration of the continued decline in tax revenues. The country’s tax revenue tumbled by 36.4 trillion won ($27.6 billion) in the first five months of 2023 from a year earlier, government data showed Friday, due to sluggish corporate performance and a slump in the real estate market.
During the January-May period, tax revenue came in at 160.2 trillion won, down from 196.6 trillion won recorded a year earlier. In May alone, tax revenue went down by 2.5 trillion won on-year to 26.2 trillion won.
Both income and corporate taxes collected in May dropped compared to a year earlier. Inheritance and gift tax revenue also fell over the same period as the property market was mired in a downturn.
If the current trend continues, the government is unlikely to meet its yearly tax revenue target of 400.5 trillion won for 2023, with the shortfalls projected to reach around 41 trillion won.
Critics argue that 17 trillion won out of the 41 trillion won in projected shortfall this year would stem from corporate and property tax cuts the Yoon administration made last year.
One hopeful sign is that the country reported a trade surplus in June for the first time in 16 months, with government officials touting it as a sign of an economic rebound. But given that outbound shipments fell for nine straight months, hurt by lower demand for semiconductors, the outlook is still far from rosy.
Worse, the rival parties are now wrangling over whether the government needs to draw up a supplementary budget to help people in need amid lingering concerns about snowballing national debt and populist projects of some lawmakers.
Against this backdrop, the government has to seek more belt-tightening measures while safeguarding essential expenditure in the revised budget for next year in a bid to achieve the nation’s fiscal soundness. It is no easy task and is certainly more important than election results.