Tax shortage forces gov't to mull restricting budget spending

The Korea Times

The Korea Times

Finance

Mon, September 25, 2023 | 04:50

Economy

Tax shortage forces gov't to mull restricting budget spending

Posted : 2023-05-22 15:58

Updated : 2023-05-23 11:21

Finance Minister Choo Kyung-ho answers questions raised by lawmakers at the National Assembly in Seoul, Monday. Yonhap

Finance minister says gov't not considering preemptively halting spending

By Lee Yeon-woo

With a fiscal deficit looming, government restrictions on budget spending are looking increasingly inevitable. Given the challenges in planning a supplementary budget and the finance minister's opposition to it, cutting expenditures is currently the most viable option to address the fiscal deficit.

According to market watchers and local media outlets, Monday, the government is considering measures to utilize the unused budget to tackle this year's fiscal deficit.

In general, annual budgets remain unused when the projects they were allocated for are halted or delayed. However, the government can also decide not to use a portion of the budget to decrease expenditures when tax income is insufficient.

Regarding the speculation, an official from the Ministry of Economy and Finance told The Korea Times that the ministry is not currently "reviewing budgets that are expected to be unused."

He highlighted that more time is needed to figure out the exact size of the deficit. "We don't know the exact scale of the shortage yet, and without knowing that scale, it doesn't seem feasible to undergo such procedures at this moment," he said.

However, market watchers consider such government measures to be highly likely, as Finance Minister Choo Kyung-ho has made it clear several times that there will be no supplementary budget this year despite the looming fiscal deficit.

"The fiscal situation is not good, so we have to adjust to it," Choo said last month, implying a halt in spending.

The Ministry of Economy and Finance building in Sejong City / Yonhap

Within just the first three months of the year, the deficit already surpassed 90 percent of the total amount projected for the entirety of 2023, with first-quarter revenue declining by 24 trillion won ($18.2 billion).

The government has claimed that the deficit can be recovered significantly in the second half of this year when the economy rebounds.

"Despite recent poor performance in tax revenue, I cautiously expect that it will naturally recover as the economy improves," the finance minister said during a meeting at the National Assembly on Monday, adding that the government is currently not considering underusing the budget preemptively.

However, the prevailing view is that the growth rate for the second half of the year will not meet market expectations. Last week, Moody's downgraded the country's growth rate outlook to 1.5 percent from the previous estimate of 1.6 percent, echoing actions by other global financial institutions. The Bank of Korea is also expected to lower the country's growth outlook this coming Thursday.

If the government does decide to cut expenditures, experts warn this move requires a cautious approach. They note that when budgeting, the size of expenditure is determined by taking into account how the spending will contribute to growth rates. Reducing expenditures drastically could further depress the already-low growth rate.

To avoid such pitfalls, Sung Tae-yoon, an economics professor at Yonsei University, stressed that "the government should prioritize reviewing the economic feasibility or validity of a project."

yanu@koreatimes.co.kr