Critical tax revenue shortfall
Tax revenue last year was nearly 11 trillion won ($9.92 billion) short of expectations, largely due to the worsened corporate profitability from global slowdown and a prolonged slump in domestic consumption. According to the Ministry of Strategy and Finance, tax revenue collected in 2014 totalled 205.5 trillion won, 10.9 trillion won short of the government’s target of 216.5 trillion won. The government has been collecting less tax than expected for the past three years.
Companies’ profitability worsened due to the double whammy of reduced demand overseas and at home. Corporate tax revenue was 3.3 trillion won less and value-added taxes were 1.4 trillion won less than estimates because companies earned less. Revenue from import duties was 1.9 trillion won less than expected due to the strong won and lower oil prices. Levies from stock transactions and financial interest gains were 900 billion won, 1 trillion won below expectation, due to poor stock performance and low interest rates.
Because revenue was below budget, business plans had to be put on hold. Spending that had been deferred due to a lack of funds amounted to 17.5 trillion won. This can be blamed on bad financial planning by the government and legislature. Much of the budget went to pork-barrel projects to benefit constituencies as the legislature and government pushed to pass the budget bill on time. Revenue forecast was based on overly optimistic outlook for economic growth and inflation.
But the mistake is bound to be made again this year. The government has estimated tax revenue at 221.1 trillion won this year, 2.1 percent more than last year’s estimate and 7.6 percent more than what was collected. The government expects its corporate tax collection will be on target due to reduced exemptions and deductions for large companies. But the revenue forecast was based on estimates that the current account will grow 6 percent, which won’t be easy to achieve. The Bank of Korea and the state economic think tank Korea Development Institute estimate this year’s growth will be 3.4 percent and 3.5 percent, respectively. Consumer price gains have been below 1 percent. At this rate, tax shortfall will be inevitable.
The government needs to make more realistic estimates. If the economy performs better than expected, there will be no problem. Legislators should end with their pork-barrel practices. Welfare programs also need to be restructured so that they are affordable. Difficult times demand austerity and practical financial planning.
JoongAng Ilbo, Feb. 12, Page 30