| National tax revenues of last year were less than expected for the first time since the 2004 credit card crisis. The government raised more than 1 trillion won (910 million U.S. dollars) in value-added taxes, tariffs and special taxes for rural areas due to lackluster consumption and the downturn in the stock and real estate markets. This resulted in a shortfall of 2.8 trillion won (2.56 billion dollars) against the targeted amount and a negative retained earnings or tax revenues after last year뭩 government spending, a first in the country`s history. The outgoing Lee Myung-bak administration is leaving an overdraft account to its successor for the first time in history due to the economic downturn.
The incoming Park Geun-hye administration will be under pressure since it must govern with a deficit. Former governments used to cut taxes or implement pledges using retained earnings of trillions of won (billions of dollars) from their predecessors. The next administration will have no extra money and will probably have to issue government bonds to generate more funds for pump-priming and implementing welfare pledges. Moreover, it has to prepare budget for the president-elect`s election pledges, which is estimated to cost up to 135 trillion won (123.4 billion dollars) over the next five years.
To make matters worse, the weak Japanese yen is putting Korea in a tougher situation. Seoul had planned a budget with a rosy growth forecast of 4 percent this year but the Bank of Korea and private think tanks say the 2-percent range is more realistic. The government might have thought it could cover the shortfall in tax revenue because it raised more aggregate income tax from the self-employed and corporate tax than expected last year, but lower earnings by conglomerates and the self-employed will prevent this. A 1-percent decline in economic growth cuts about 2 trillion won (1.8 billion U.S. dollars) in tax revenue. In this context, the deficit is likely to persist for two consecutive years.
To get out of the negative loop of lower tax revenues and higher debt, the incoming administration should put priority on job creation and economic revival. It cannot persuade the people if it simply gives unclear answers whenever the feasibility of pledges is questioned or tries to cobble numbers together to meet its pledge of 135 trillion won (123.4 billion dollars). The number of pledges should be cut and priorities must be set to increase the viability of the promises.
Unless the economy revives, taxes from the underground economy or cutting tax benefits from high-income households will not do much. To form large financial resources simply by cutting budget without increasing taxes is difficult. President-elect Park뭩 willingness to implement her pledges without increasing taxes will face the challenge of lack of financial resources. Social consensus and public discussion are needed on the level of welfare expectations and how and where to raise more taxes so that economic pressure is avoided. The Park administration could miss out on opportune timing if it dawdles.
This economic crisis is hardly expected to end in one or two years. So the next administration must appoint a competent deputy prime minister for the economy with a balanced view and insight to change economic fundamentals, find new growth momentum, and maintain financial stability.