Welfare Spending Surges amid Tax Revenue Fall

South Korea's fiscal deficit hit a record high in the first half of this year.

South Korea's fiscal soundness is rapidly deteriorating, with the government's budget balance suffering a record deficit in the first half of this year. The ballooning deficit was the result of the government's expanded spending on various welfare policies despite a slowdown in tax revenue, including income tax and corporate tax, amid the economic slowdown.

South Korea's consolidated fiscal balance, or the difference between the total revenues and total expenditure, posted a deficit of 38.50 trillion won (US$31.73 billion) between January and June, according to a report on monthly fiscal trends released by the Ministry of Economy and Finance (MOEF) on Aug. 7. The operational budget balance, which excludes the four social security-related funds from the consolidated fiscal balance, showed a deficit of 59.50 trillion won (US$49.01 billion). The operational budget balance represent the outcome of the current year’s fiscal operations. Both deficit figures were the largest since the ministry has started collecting such data in 2011.

The fiscal balance is one of the key barometers measuring national fiscal soundness. South Korea’s fiscal deficits has snowballed in the first half of this year due to the fast pace in the government’s execution of public finance to revitalize the nation's sluggish economy. The government spent 190.70 trillion won (US$157.16 billion) in the January-June period, up 28.10 trillion won (US$23.17 billion), or 3.3 percentage points, from the same period last year. However, it did not help stimulate the economy because of a continued downturn trend in exports and investments.
 

The government spent 284.50 trillion won (US$234.47 billion) in the first half, which was 37.20 trillion won (US$30.66 billion) higher than a year ago. The total expenditure came to 49.60 trillion won (US$40.88 billion) in June alone, up 7.70 trillion won (US$6.35 billion) from the same period last year. On the other hand, the national tax revenue increased only 2.30 trillion won (US$1.89 billion) on year to 246 trillion won (US$202.67 billion) in the first half. This is because the national tax income, such as income tax, corporate tax and value added tax, posted a minus growth. The national tax income between January and June stood at 156.20 trillion won (US$128.67 billion), down 1 trillion won (US$823.72 million) from a year earlier. The rate of tax collection, which shows the ratio of tax collected compared to an annual plan, was 53 percent, down 5.6 percentage points from last year.


By sector, the cumulative amount of income taxes from January to June totaled 44.50 trillion won (US$36.64 billion), up 200 billion won (US$164.65 million) from a year ago. Corporate taxes grew 2.20 trillion won (US$1.81 billion) on year to 42.80 trillion won (US$35.24 billion) in the first half. However, the collection rate of corporate taxes stood at 54 percent, showing a whopping 10.5 percentage points decline from last year when a considerable amount of tax revenues was collected. Value added taxes, one of the three biggest items of taxation along with the income tax and corporate tax, fell 200 billion won (US$164.65 million) on year to 34.50 trillion won (US$28.40 billion).

As the government’s spending on various welfare policies increased despite the decline in tax revenues, the debts of the central government grew to 686.90 trillion won (US$565.54 billion) as of June. The figure surged by 1.50 trillion won (US$1.23 billion) from the previous month and 35.10 trillion won (US$28.91 billion) in just six months from 651.80 trillion won (US$536.77 billion) at the end of last year. It is rare that government debts showed a sharp increase in such a short period. Government debts rose by 24.40 trillion won (US$20.10 billion) from 627.40 trillion won (US$516.80 billion) to 651.80 trillion won (US$536.90 billion) last year, the second year of the Moon Jae-in administration. In short, the figure increased by 1.5 times of the annual growth of government debts in six months.

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