More stimulus necessary

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More stimulus necessary

The South Korean government has announced it ran its largest-ever fiscal deficit of 46.2 trillion won ($41.6 billion) in the first half of the year. The figure is 16 trillion won larger than the same period a year ago and 6 trillion won more than in the first half of 2009, after the government raised a 17.3 trillion won supplementary budget to stimulate the troubled economy.

The biggest reason for the deficit is a shortfall in tax revenue. During the first six months of this year, the government collected only 47.1 percent of its annual target. It marks the first time in six years that the government has failed to collect at least half of its annual target.

The amount collected is more than 9 trillion won less than what was collected during the same period last year. Collection of value-added tax, or consumption tax, plummeted by about 2 trillion won and corporate tax fell by 4 trillion won. Only the collection of personal income tax increased.

It is not difficult to figure out why. The economy has performed worse than expected. Corporate tax decreased because operating profits of companies fell the previous year. Value-added tax slumped because consumer spending was sluggish.

No matter how the government toughens tax audits and digs up unreported taxes, it cannot expect to squeeze out more from the corporate and consumer sectors. The economy will only worsen if authorities try to whip up more tax revenues in order to meet its targets.

There is no other way but to boost the economy and private spending in order to increase tax revenue. When the economy grows by 1 percent, the growth equates to a tax revenue increase of about 2 trillion won, and the government is well aware of this correlation.

This is why the government pins its hopes on an increased pace of growth to the mid-3 percent range in the second half of the year. It expects the fiscal deficit will be reduced to 23 trillion won this year.

But that can all be just wishful thinking. The economy does not suddenly recover and consumers don’t just start spending again.

The government must take additional stimulus actions. It must decide whether to create another supplementary budget or reduce expenditures by scaling down welfare spending.

We would like to emphasize it one more time: Fiscal integrity must be upheld. The current public health of public finances may not be so worrisome, but the country has been incurring deficits for years. It may be too late to undo the harm later.



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