High Cost of Policy Failure
The Korean government and the ruling Democratic Party are planning to greatly expand next year’s budget, despite the growing tax burden on companies. Although its job creation policy based on the public sector practically ended in failure, the government is seeking to shift the burden to businesses once again and still sticks to the ill-advised economic policy. Some already criticize that it is a “populist policy.”
The Korea Economic Research Institute (KERI) announced on August 23 that the national tax income, which stood at 265.4 trillion won (US$236.54 billion) last year, will reach an all time high of 302.5 trillion won (US$269.61 billion) this year. Accordingly, the ratio of tax revenue to national income will also hit a new record high of 21.6 percent this year from the highest rate ever of 20 percent last year. The ratio of tax revenue to national income is the percentage of an ordinary gross domestic product (GDP) that goes toward national and local taxes. It increases when a tax revenue grows faster than the rise in GDP.
By item of taxation, corporate taxes shows the highest speed of the increase. The rate of corporate tax increases rose 23.9 percent points in just four years from minus 2.7 percent in 2014 to 21.2 percent this year. This is twice as high as 12.1 percent points of the growth of the total national tax income, which increased from 1.8 percent to 14 percent, over the same period. The KERI also said that the excess amount of tax collected over budgets will reach 34.4 trillion won (US$30.66 billion) this year, recording at 11.4 percent of the rate of tax revenue forecast errors. In other words, the government collects more money than it needs.
Nevertheless, the government and the ruling party have decided to continue the job creation and income-led growth policy by significantly raising the budgets, instead of reducing tax revenues. Previously, the government was planning to increase set the next year’s budgets at 462 trillion won (US$411.76 billion), up 7.7 percent from this year. However, it is now considering increasing the budgets 10 percent further.
At the government-ruling party meeting to discuss the details of the 2019 budget on the 23rd at the National Assembly, Kim Tae-nyun, policy head of the Democratic Party, announced that they decided to manage the next year’s budgets as expansive as possible in order to create jobs, strengthen the social safety system and revitalize the regional economy. The government-ruling party is planning to invest 7.4 trillion won (US$6.6 billion) in the budgets for unemployment benefit coverage increases and support 3 trillion won (US$2.67 billion) to small and medium sized business owners for business stabilization again next year. In short, it will largely increase the budgets focusing on distribution and social safety net reinforcement.
In this regard, some experts pointed out that it is seeking to pursue the government-led economic policy once again, though it already saw the limits of public sector-based job creation policy. They warned that it is ineffective and the government will face difficulties in reducing tax revenues after the economic downturn caused by the expansion policy. In fact, according to a recent report titled “Employment Trend in July” from the National Statistical Office, the number of those employed stood at 5,000 in July, showing the lowest growth in eight years and six months after January 2010.
An official from the private business industry said, “Considering the fact that the government spent nearly 50 trillion won (US$44.56 billion) of the budgets on creating jobs and got the worst employment rate, it is clear that the expansionary fiscal policy cannot create jobs. The rate of tax revenue increases is also highly likely to reduce as the manufacturing business is down and the economy is on the decline.” Another expert said, “The national debts currently grow 6 percent a year on average. It is too excessive because it is twice as high as 3 percent of the national economic growth. The burden will become too heavy for the current young adults and middle-aged people five to 10 years later so it is time to pull up the reins of finance management.”