S. Korea Tax Debate Ignites as Revenue Gap Hampers Park: Economy

Photographer: SeongJoon Cho/Bloomberg

Park Geun Hye, South Korea's president, speaks during the presidential inauguration held in front of the National Assembly in Seoul on Feb. 25, 2013. Close

Park Geun Hye, South Korea's president, speaks during the presidential inauguration... Read More

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Photographer: SeongJoon Cho/Bloomberg

Park Geun Hye, South Korea's president, speaks during the presidential inauguration held in front of the National Assembly in Seoul on Feb. 25, 2013.

Seven months after taking office, South Korean President Park Geun Hye’s election promises threaten to unravel as revenue shortfalls ignite a debate on tax increases to pay for her welfare and defense spending plans.

A budget plan for 2014 is due to be submitted to the National Assembly by Oct. 2, as Park chases 135 trillion won ($126 billion) over five years to fund her pledges. The president is likely to comment on her promises at a Cabinet meeting on Sept. 26, her spokeswoman Lee Mi Yon said today.

South Korea’s fiscal deficit widened to a record 46.2 trillion won in the first half as slower growth dented revenue, leading some lawmakers in Park’s ruling Saenuri party to say that tax increases could be needed to fund the extra spending. Any move to push up levies would risk dragging down the president’s popularity and sapping momentum from Asia’s fourth-largest economy as policy makers try to cement a recovery.

“If the government starts raising taxes, it’s likely to hit big business and high-income individuals,” said Jeon Young Jae, a Seoul-based economist at Samsung Economic Research Institute, adding that higher corporate taxes could “damp momentum in production.”

The government aims to sustain the pace of economic growth after a 1.1 percent expansion in the second quarter that was the fastest in more than two years. The Kospi index of stocks has climbed about 12 percent from this year’s low in June as exporters such as Samsung Electronics Co. weather the decline in the yen that aids rivals in Japan.

Photographer: Woohae Cho/Bloomberg

A woman walks past graffiti on a wall in the area of Hannam-dong in Seoul. South Korea’s fiscal deficit will widen to 1.8 percent of gross domestic product in 2013 from 1.4 percent last year, the government forecast in May when the parliament approved an extra budget to help spur growth. Close

A woman walks past graffiti on a wall in the area of Hannam-dong in Seoul. South... Read More

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Photographer: Woohae Cho/Bloomberg

A woman walks past graffiti on a wall in the area of Hannam-dong in Seoul. South Korea’s fiscal deficit will widen to 1.8 percent of gross domestic product in 2013 from 1.4 percent last year, the government forecast in May when the parliament approved an extra budget to help spur growth.

‘Last Resort’

The Kospi index was roughly unchanged at 2:38 p.m. The won was also unchanged at 1074.15 per dollar.

While Park aims to provide more support to an aging population, narrow an income gap and bolster the military, she said during her election campaign that raising taxes would be a “last resort.” Instead, she aimed to use measures such as a crackdown on tax dodging and the cash economy, and cuts to government spending in other areas, to find the cash.

Last week, she told ruling and opposition party leaders that increasing taxes would be possible “under a national consensus,” according to Yeo Sang Kyoo, a ruling party lawmaker.

Park will preside over the Cabinet meeting on Sept. 26 instead of the prime minister and will probably comment on her election pledges to expand pensions for the elderly and support for people with four major diseases, including cancer and cardiac disorders, said Lee, the president’s spokeswoman. Lee declined to elaborate.

‘Road Map’

The government may not stick to her welfare pledges, including pensions for the elderly, due to revenue constraints, Chosun Ilbo reported yesterday, citing unnamed government officials.

“The government seems to have no road map,” another ruling party lawmaker, Kim Tae Ho, said at parliament committee on Sept. 13. “Most people agree you can’t raise enough money” through targeting tax evasion and looking for savings within government spending, the lawmaker said.

For his part, Finance Minister Hyun Oh Seok has said that the government should focus on efforts such as reducing tax exemptions and cracking down on the cash economy before turning to tax increases.

In an interview in Seoul on Aug. 28, Hyun said he “cannot say” whether the government will achieve a goal of balancing its books by 2017, citing factors including the decline in tax revenue. “All I can say is that fiscal consolidation is the most important issue that the government keeps in mind.”

Support Falls

Already, the government has struck controversy over taxes. A revised tax code announced by the finance ministry on Aug. 8 was scrapped by Park four days later after complaints from members of the public and politicians that it favored the wealthy and conglomerates. The president said her administration hadn’t intended to thin the wallets of low and middle-income earners.

South Korea’s main opposition party has boycotted the current session of parliament since Sept. 2 over allegations that the national spy agency meddled in the presidential election in which Park won.

Park’s support rate fell to 60.9 percent on Sept. 20 from a record high of 69.5 percent on Sept. 10, after steadily recovering from 45 percent in late March, according to a survey by Seoul-based pollster Realmeter.

Household Debt

“If the public starts believing that Park is backtracking on her pledge to increase welfare and favoring conglomerates, her approval ratings could take a hit,” said Choi Chang Ryul, a professor of liberal arts at Yong In University, south of Seoul, and a political commentator.

The South Korean economy faces headwinds, with record household debt and a sluggish housing market weighing on consumption. A slowdown in business investment prompted Park to consult with business heads last month on regulatory changes that could help create jobs and boost wages. In the longer term, officials also face the challenge of an aging population.

The nation’s fiscal deficit will widen to 1.8 percent of gross domestic product in 2013 from 1.4 percent last year, the government forecast in May when the parliament approved an extra budget to help spur growth.

“The government will be in a perennial tug-of-war over fiscal restraint for a long time as it deals with the aging population and increasing welfare costs,” said Jeon at Samsung Economic Research Institute.

Standard & Poor’s said in a statement today it affirmed South Korea’s long-term ratings at A+, reflecting the country’s “favorable” policy environment and “sound” fiscal position, and net external creditor status.

Later today in Europe, data may show that German business confidence increased for a fifth month in September amid signs the economic recovery is continuing in the euro area, according to a survey of economists by Bloomberg News.

Other data in the U.S. may indicate consumer confidence slipped in September while the pace of gains in home prices in July picked up, Bloomberg surveys showed.

To contact the reporters on this story: Cynthia Kim in Seoul at ckim170@bloomberg.net; Eunkyung Seo in Seoul at eseo3@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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