The South Korean government is considering the flexible execution of its budget throughout the remaining period of this fiscal year as it is facing a shortfall in tax revenue driven by the economic slowdown this year.

For now, the government is not considering a supplementary budget and is opting to make the most of its available resources, said the Ministry of Economy and Finance on Monday. As of March, the government’s tax revenue this year was 87.1 trillion won ($65.6 billion), down 24 trillion won from 111.1 trillion won from a year before, said the ministry. The fall is attributed to a significant drop in revenue from three major tax categories - income tax, corporate tax and value-added tax - as economic uncertainties have led to fewer real estate transactions, poor performance among companies and weak domestic demand.

Following the reduction in tax inflows, total government revenue also fell by 25 trillion won to 145.4 trillion won compared with a year before. Even based on the assumption that the tax revenue from April to the end of this year will be the same as last year, the figure at the year-end would stand at 371.9 trillion won, nearly 30 trillion won smaller than the government‘s estimated 400.5 trillion won.

The finance ministry is not concerned too much about tax revenue based on a back-loaded forecast this year. “There is no change in the government’s approach to the budget as the economy is expected to be better in the latter half, though it started weak in the first half,” said one official from the ministry.

Instead, the ministry is looking at mobilizing all available resources, including underspending of the allocated budget. Underspending or underexecution of the budget usually occurs when a project is on halt or where there are other circumstances that hinder the implementation of a project. This year the underspent budget could be used to make up for the shortfall in tax revenue.

The underspent budget this year is expected to be around 10 trillion won. The figure last year was 12.9 trillion won, accounting for about 2.2 percent of total spending. In the previous years, 8.3 trillion won was underspent in 2021, 6.6 trillion won in 2020, 7.9 trillion won in 2019 and 8.6 trillion won was underspent in 2018.

The finance ministry is not considering the encouragement of underspending, though. “We are not considering any forced underspending,” said Choo Kyung-ho, the finance minister.

Another option for the government is to use tax surpluses, which refer to the sum of the leftover as well as the unspent tax revenue and budgetary allocations from the previous year. As of fiscal year 2022, net surplus is 2.8 trillion won, after excluding all necessary expenditures. With surpluses from the special account included, the available funds are about 5.9 trillion won, though the budget allocated to the special account has a range of predetermined destinations. When making the most of the unspent budget and surpluses altogether, the government has about 15 trillion won to 20 trillion won in additional funds in its treasury.

If the trend of smaller tax revenues continues even after the second quarter, however, the government might have to start discussions on a supplementary budget. Indeed, the government may change its positive outlook in the second half this year at pressure from lawmakers and the public to take action, as major institutions are downgrading their economic forecasts.

The Bank of Korea recently lowered its economic growth forecast for this year to 1.4 percent, from 1.6 percent. The Korea Development Institute also revised its growth forecast to 1.5 percent, from 1.8 percent.

Narrowing the figure only for the second half this year, the central bank revised the estimated growth to 1.8 percent, from 2 percent, and the KDI to 2.1 percent, from 2.4 percent. Some analysts project that the finance ministry may revise its yearly growth forecast slightly downward from the current 1.6 percent.

By Lee Hee-jo and Chang Iou-chung

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]