Gov't to seek tighter budget, prioritize fiscal soundness
Finance Minister Choo Kyung-ho enters for a press briefing on South Korea's 2024 budget in the central city of Sejong, Aug. 24. Yonhap
Korea's smallest increase in its budget proposal in almost two decades illustrates the government's commitment to improving fiscal soundness amid declining tax revenue and economic uncertainties.
On Tuesday, the country announced its plan to seek a 654.2 trillion-won ($495 billion) budget for 2024, which represents 2.8 percent growth from the amount allocated for this year.
It marked the lowest on-year rise since 2005. In its first year in office, the Yoon Suk Yeol administration raised the budget by 5.1 percent for 2023.
During the previous Moon Jae-in administration, Korea's budget increased by an average of 8.7 percent annually, as the government sought to create jobs and address the impact of the COVID-19 pandemic.
The continued belt-tightening of the incumbent administration came amid the falling tax revenue.
"If the country manages expenditures in a reckless manner despite such challenging fiscal situations, it will deteriorate our external fiscal credibility, while burdening the future generation excessively," Finance Minister Choo Kyung-ho said during a meeting with reporters.
The country's tax revenue reached 178.5 trillion won during the January-June period of 2023, down from 218.3 trillion won tallied a year earlier, the finance ministry's data showed earlier.
Under the 2024 budget, Korea estimated a collection of 612.1 trillion won in gross revenue for next year, down 13.6 trillion won on-year.
This includes tax revenue of 367.4 trillion won, down 8.3 percent on-year, along with non-tax receipts of 244.7 trillion won, up 8.7 percent.
The finance ministry said its collection of income tax is expected to fall 6 trillion won on-year in 2024 amid uncertainties in the property market.
The collection of corporate tax was also estimated to fall 27.3 trillion won over the period due to the weak earnings posted this year.
The total deficit, meanwhile, amounts to 3.9 percent of the 2024 GDP, surpassing the 3 percent target set under the government's envisioned fiscal rule.
"In 2025, we plan to limit the managed fiscal balance to 2.9 percent of the GDP. The rate will also gradually fall further down the road," a finance ministry official said.
As the declining tax revenue induces the government to pursue a more restrained budget, experts express concerns that this action could potentially impede the long-term growth of Asia's fourth-largest economy.
People shop for groceries at a supermarket in Seoul, Aug. 27. Yonhap
"Although we need to cut unnecessary spending, it is not desirable to keep the economy in a slump," Kim Jung-sik, an honorary professor of economics at Yonsei University, told Yonhap News Agency.
"A fiscal policy should not only focus on avoiding an excessively expansionary approach, but it should also make efforts to avoid an economic slump," Kim said.
Ha Joon-kyung, a professor of economics at Hanyang University, also said it is important that the government build the foundation to expand tax revenue.
"When it comes to fiscal soundness, it is important to seek mid- and long-term sustainability," Ha said. "Despite temporarily unfavorable fiscal soundness figures, harnessing the budget to enhance long-term growth potential can strengthen the foundation for tax revenue and facilitate adaptation to economic cycles."
Such concerns also come as Korea is facing growing uncertainties from China, its top trading partner.
Experts say China's delayed economic recovery, coupled with the property market crisis, may weigh down the Korean economy.
Korea faces risks from the prolonged monetary tightening in the United States. Elevated U.S. interest rates could trigger capital outflows from Korea, further strengthening the U.S. dollar and driving up the cost of imports, ultimately exerting upward pressure on inflation.
Last week, the Bank of Korea also revised down its growth projection for next year to 2.2 percent from May's 2.3 percent amid such uncertainties.
Addressing these concerns, Choo said that the government's emphasis has been on trimming unnecessary expenditures to create greater leeway for bolstering people's livelihoods and promoting stability.
"We have allocated a lot of the budget for the welfare of vulnerable people, which is normally deemed less viable for a conservative administration," Choo said.
"Amid challenging economic circumstances, some argue that the government should consider enlarging cash expenditures, even if it entails taking on debt," the finance minister said. "But that is an irresponsible action that seeks short-sighted benefits at the burden of the future generation."
Korea needs to maintain an unwavering fiscal soundness and refrain from expanding expenditures through a massive issuance of bonds, Choo added.
The government, meanwhile, emphasized that the latest "restructuring" of the budget does not necessarily mean that it will cut spending on vital welfare programs.
"We have secured 18 trillion won through a 2.8 percent rise (in the budget) and also saved 23 trillion won by restructuring the spending, which totals 41 trillion won. It will be reinvested in areas, such as stabilizing people's livelihoods and safety," Choo added. (Yonhap)