Tax shortfall means trouble

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Tax shortfall means trouble

The Park Geun-hye government’s anticipated shortfall in tax revenue will not only weaken economic growth, but further depress key interest rates, according to a report by SK Securities released yesterday.

The report said Korean government spending has be en growing by 6.6 percent annually since 2005.

From 1990 to 2012, for example, government spending on average accounted for 0.6 percentage point of GDP, with the contribution to growth widening year after year.

But the report suggested things will turn around this year and worsen next year due to the prolonged global economic slowdown and the government’s slashing of corporate taxes.

“The central government’s tax revenues in the January to May period slipped 9 trillion won ($8.1 million) compared with the same period a year before,” said Yeom Sang-hoon, an analyst at SK Securities. “But given that this year’s tax revenue target - which reflects the supplementary budget - is 7 trillion won higher than last year’s, this means the Park administration is short a total of 16 trillion won.”

The National Tax Service has set a goal of collecting 199 trillion won in taxes this year, slightly higher than last year’s 192 trillion won, but chances are slim that the government will achieve that goal, the report said.

“The Bank of Korea and Ministry of Strategy and Finance’s growth forecast for next year is 4 percent,” said Yeom. “Although the ratio reflects the government’s increased spending, I suspect it doesn’t reflect shrinking tax revenues. If the government’s spending decreases by 10 trillion won, for example, this will cause economic growth rate to plunge up to 0.7 percentage point. The government’s spending even less money will push down key rate further.”

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