Fiscal irresponsibility

The red light is blinking in terms of the government’s tax revenues after it recorded a whopping 36.5 trillion won ($30.85 billion) deficit from January through May, the largest losses since 2011, when it started to collect related data. That resulted from the liberal administration’s hefty spending despite a lack of tax revenue. The amount of tax collected in the first five months decreased by 1.7 trillion won compared to a year earlier. The Ministry of Strategy and Finance attributed the deficit to increased spending in the first half to rev up the economy. The ministry said that will change as government spending will decrease and tax revenue will be restored sooner or later.

But reality points in the other direction. Serious concerns are being raised over the possibility of the government failing to collect corporate tax, income tax and value-added tax — three pillars of a government’s tax revenues — as expected. It could collect about 2 trillion won more corporate tax in the first five months than a year earlier, but that calculation was based on companies’ performances last year. The second half will be different given the alarming reduction of operating profits of listed companies by 40 percent in the first five months. The struggling semiconductor industry coupled with Japan’s economic retaliation heralds an even gloomier future for Korea Inc.

Income tax and value-added tax, which depend on economic growth, are no exceptions. As a result of a negative growth (-0.4 percent) in the first quarter, the two taxes dwindled. International analysts are lowering Korea’s growth rate projections for this year. Morgan Stanley slimmed it down to 1.8 percent from 2.2 percent while ING Group and Nomura Securities lowered it to 1.5 percent and 1.8 percent, respectively.

The government must safeguard fiscal integrity given our fast-ageing population, extremely low birthrates, and rapidly mounting debts of public corporations and households. Yet the government drew up a 470 trillion won supplementary budget in the name of a “balanced regional development” ahead of the general election next April.

The government’s spending spree has led to an unprecedented fiscal deficit. To make matters worse, our economy calls for another supplementary budget. The government must bolster its fiscal integrity by cutting unnecessary spending. If it sticks to naïve thinking that the economy will get better in the second half, that will only push it into a recession.

JoongAng Ilbo, July 10, Page 30