Tax cuts plus spending increase is shortcut to fiscal deficit
One of the Yoon Suk-yeol administration's key economic policies is bold tax cuts. For starters, it plans to slash the top corporate tax rate by 3 percent, lower the property holding tax for owners of only one home to the 2020 level and reduce the stock transaction tax by 0.03 percent. On the other hand, the government will also expand welfare programs by, for instance, raising the basic pension for older adults by 100,000 won ($77) a month. All these will undoubtedly increase financial pressure on the government.
Of course, Korea needs to cut the corporate tax rate to reinvigorate its sluggish economy and lower real estate taxes pushed up abnormally by the previous government to curb speculation. Tax cuts also stimulate robust business investment to jumpstart the economy, increasing tax revenue in the medium to long term. However, while revenue growth resulting from tax cuts takes a long time to materialize, revenue drops from them appear immediately. Tax officials expect this year's tax receipts to fall by more than 10 trillion won due to tax cuts announced so far. Unless accompanied by corresponding spending cuts, these are highly likely to swell the national debt in the short run.
The Yoon administration has inherited a national accounting book fraying at the edge because of its predecessor's big spending. The national debt exceeded 1,000 trillion won as of April 30, and the deficit in the fiscal management balance also surpassed 38 trillion won. President Yoon's campaign pledges will also result in one costly undertaking after another. The financial requirements for implementing national tasks are estimated to reach 209 trillion won over the next five years.
Economic policymakers vow not to issue any more government bonds, aside from this year's primary budget and the 88 trillion won reflected in the first extra budget. However, deficits are bound to increase if tax cuts are combined with a spending increase. If the government is to keep its promise not to increase the national debt, it has no choice but to cut back drastically on unnecessary and nonessential spending. Instead of paying lip service to "sound finance," the government should present solid and specific measures to restructure its spending.