Finance ministry criticized for inaccurate tax revenue projections

Deputy Prime Minister and Finance Minister Hong Nam-ki attends a meeting at the Seoul Government Complex, June 4. Korea Times file

By Lee Kyung-min

The government is coming under criticism over about 30 trillion won ($26.8 billion) in expected excess revenue this year, a result of inaccurate tax revenue projections which some economists say limited fiscal discretion and effective debt management.

The 30 trillion won accounts for about 10 percent of 282.7 trillion won in tax revenue the government expected last year to collect this year.

The error ratio, the difference between total expected revenue and the amount collected divided by the total expected revenue, has risen to 10.6 percent, the first time ever for the figure to record a double digits.

The government maintains that the figure exceeding 10 percent reflects the harsh economic and financial conditions last year when the projections were made in the midst of the COVID-19 pandemic.

Yet such a large difference undermines the effective use of state resources, because had the figure been lower, the government would not have needed a second extra budget. Under the law, about 40 percent of the newly drafted extra budget must be first allocated to municipalities and the remaining 60 percent to be used for central government spending.

This means a more accurate projection would have led to a fully targeted spending on containment and debt-reducing measures, without nearly half of the state budget being claimed by municipalities whose administrative spending needs are not as urgent in times of health crisis.

Economists say the government should therefore disclose the revenue projection model, a critical step that will remove government discretion in arbitrarily setting the figures at the expense of efficient fiscal planning and execution.

They also call for a new rule whereby the government must factor in nominal growth forecast projected by state think tanks, which should provide a limit on the government's estimates.

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Figures

This year's error ratio of 10.6 percent is an all-time-high figure. It undermines the government's success two years earlier in reducing the error, as evidenced by the ratio standing at -0.5 percent in 2019. It was a dramatic improvement from 9.5 percent in 2018. The ratio was 4.2 percent in 2016 and 5.7 percent in 2017.

According to the Ministry of Economy and Finance, the country's tax revenue will amount to 310 trillion won, far greater than the previously expected figure of 282.7 trillion won.

The tax paid in the first four months of this year was 133.4 trillion won, up 32.7 trillion won from a year earlier.

The increase was attributable to corporate and value-added taxes which increased by 8.2 trillion won and 4.9 trillion, respectively, year-on-year.

This was due to improved corporate performance backed by robust imports and exports.

Capital gains tax involving real estate trading and securities transaction tax also jumped 3.9 trillion won and 2 trillion won, respectively. Inheritance tax paid by the late Samsung Chairman Lee Kun-hee was expected to amount to about 2 trillion won.

April's figure was the continuation of greater-than-expected tax income. Income tax in the first three months of this year was 28.6 trillion won, bolstered by a 6.4 trillion won year-on-year jump. Nearly half, or 3 trillion won, came from capital gains tax from real estate transactions.

The first-quarter surplus fanned optimism because the first three months in any year are generally known to be in deficit due to the base effect from the year before and bookkeeping reasons.

Higher-than-expected volatility in corporate tax and capital gains tax led to what the government considers “positive shocks” in tax revenue, a one-off instance rather than the government being at fault, according to Korea Development Institute (KDI) economist Lee Tae-suk.

“Some additional tax revenue is expected in the coming months, given the government's previous conservative outlook on the economy amid lingering uncertainties brought on, and prolonged, by the pandemic,” he added.

Yet transparency in the economic forecast should be strengthened, given the significantly large figure that went beyond the understandable margin of error, according to Seoul National University economist Kim So-young.

“Granted, making a forecast is fundamentally difficult. But the difference of 30 trillion won is far greater than what should be accepted, raising suspicion that the finance ministry deliberately underestimated the figures in what some could characterize as a political motive. It therefore is best to disclose the projection model as well as the basis of the estimate,” he said.

The model should be updated in a way that can best utilize taxpayers' money, an objective that will determine the fiscal soundness of the country for which increased spending equals debt-financing.

“Korea's fiscal stability hinges on its ability to identify a continued demand from overseas investors that find the country's bonds attractive. More precise management of country's financing data that withstand uncertainties in the economic conditions will help the country in the long run.”