Aging population will require bigger welfare spending
Korea collected 378 trillion won ($332 billion) in taxes last year, up 9.3 percent from 2017, according to official data. This shows the government collected more taxes than it had expected, due in large part to stronger semiconductor sales and increased property transactions.
Needless to say, the expanded tax revenue is good news for the central government and local administrations. But it means a greater tax burden for not only individuals but also corporations.
As everyone knows, the Korean economy was in the doldrums in 2018 in the wake of steep hikes in the minimum wage and a shortened 52-hour workweek. President Moon Jae-in's income-led growth policy also contributed to the economic downturn, despite its good intention of creating more jobs and bringing higher wages to workers.
Simply put, the nation barely managed to buttress the slumping economy by increasing the exports of memory chips last year. But the situation has become worse and worse with semiconductor exports plunging this year. The cooling property market is also a negative factor in raising tax revenue.
The problem is the tax burden on individuals and businesses has risen far more sharply than economic growth. This is evident in the tax-to-GDP ratio which reached 21.2 percent in 2018, up 1.2 percentage points from the previous year. The increase was the highest since 2000 when the ratio recorded a 1.6-percentage point jump from a year earlier. On the other hand, the economy shows no sign of a recovery anytime soon.
Policymakers say the tax burden ratio was still far lower than the 25 percent average of Organization for Economic Cooperation and Development (OECD) member nations. In fact, Korea's tax-to-GDP ratio was the seventh-lowest among the OECD member states in 2017.
However, we have to pay more attention to a prediction by the International Monetary Fund (IMF) that Korea's tax burden ratio will surge to 34 percent around 2027, driven by the rapid aging of the population that will call for more welfare spending.
Adding fuel to the fire, President Moon's liberal government came up with a super budget of 470 trillion won for this year. It is also pushing for a supplemental budget of up to 9 trillion won to stimulate the economy and address the worsening fine dust problem. The outlays are likely to surpass 500 trillion won next year.
More worrisome is that "big" government has been expanding its welfare programs for the elderly and poor. Moon's generous healthcare policies and growing support for civil servants and soldiers' pension funds are also putting more financial pressure on the state budget.
Concern is growing that the country may suffer a budget deficit in the near future if its tax revenue fails to meet spending. Next year's general election could aggravate the government's fiscal health because politicians of the rival parties are feared to promise more of the state budget for pork-barrel projects.
We urge the Moon administration to make more efforts to ensure fiscal soundness with a balanced budget. What's more important and urgent is to produce an economic turnaround and raise growth potential. Let's keep in mind that the country cannot increase its tax revenue without a strong economy.
Korea collected 378 trillion won ($332 billion) in taxes last year, up 9.3 percent from 2017, according to official data. This shows the government collected more taxes than it had expected, due in large part to stronger semiconductor sales and increased property transactions.
Needless to say, the expanded tax revenue is good news for the central government and local administrations. But it means a greater tax burden for not only individuals but also corporations.
As everyone knows, the Korean economy was in the doldrums in 2018 in the wake of steep hikes in the minimum wage and a shortened 52-hour workweek. President Moon Jae-in's income-led growth policy also contributed to the economic downturn, despite its good intention of creating more jobs and bringing higher wages to workers.
Simply put, the nation barely managed to buttress the slumping economy by increasing the exports of memory chips last year. But the situation has become worse and worse with semiconductor exports plunging this year. The cooling property market is also a negative factor in raising tax revenue.
The problem is the tax burden on individuals and businesses has risen far more sharply than economic growth. This is evident in the tax-to-GDP ratio which reached 21.2 percent in 2018, up 1.2 percentage points from the previous year. The increase was the highest since 2000 when the ratio recorded a 1.6-percentage point jump from a year earlier. On the other hand, the economy shows no sign of a recovery anytime soon.
Policymakers say the tax burden ratio was still far lower than the 25 percent average of Organization for Economic Cooperation and Development (OECD) member nations. In fact, Korea's tax-to-GDP ratio was the seventh-lowest among the OECD member states in 2017.
However, we have to pay more attention to a prediction by the International Monetary Fund (IMF) that Korea's tax burden ratio will surge to 34 percent around 2027, driven by the rapid aging of the population that will call for more welfare spending.
Adding fuel to the fire, President Moon's liberal government came up with a super budget of 470 trillion won for this year. It is also pushing for a supplemental budget of up to 9 trillion won to stimulate the economy and address the worsening fine dust problem. The outlays are likely to surpass 500 trillion won next year.
More worrisome is that "big" government has been expanding its welfare programs for the elderly and poor. Moon's generous healthcare policies and growing support for civil servants and soldiers' pension funds are also putting more financial pressure on the state budget.
Concern is growing that the country may suffer a budget deficit in the near future if its tax revenue fails to meet spending. Next year's general election could aggravate the government's fiscal health because politicians of the rival parties are feared to promise more of the state budget for pork-barrel projects.
We urge the Moon administration to make more efforts to ensure fiscal soundness with a balanced budget. What's more important and urgent is to produce an economic turnaround and raise growth potential. Let's keep in mind that the country cannot increase its tax revenue without a strong economy.
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