Under-25s to be taxed 40% of income due to spike in welfare spending

Young people born in 2000 and after will have to pay 40 percent of their lifetime income as tax, unless the current welfare-heavy fiscal spending is drastically reformed, according to a report by a noted economist, Wednesday. Their lifetime per capita tax payments will exceed 1.2 billion won ($898,000).

Behind the grim assessment is Korea’s rapid deterioration in long-term fiscal sustainability as measured by S2 under the European Commission (EC).

The S2 sustainability indicator factors in the imbalance between current and future tax revenue, with the gap to be filled by public finances. The S2 indicator is for a long-term assessment, whereas S1 is for medium term and S0 is for a term of less than a year.

Korea’s S2 stood at 13.3 percent as of 2022, more than double the EC’s baseline risk threshold of 6 percent. The higher the figure, the greater the fiscal sustainability risk and the need for fiscal adjustment. Above 6 is considered high, while below 2 is low. The EC average was 2.7 percent.

The S2 is measured by dividing the country’s GDP by tax revenue needed to offset future fiscal deficit as well as current outstanding government debts.

End to expansionary

directive

“The sustained expansionary fiscal stance will be simply untenable,” said Chun Youngjun, a professor of economics and finance at Hanyang University. Specifics of his findings will be presented during a forum of economists at Seoul National University, Feb. 1.

Some maintain the debt-toGDP ratio under the Yoon Suk Yeol administration has not registered a spike as it did under the previous Moon Jae-in administration, and therefore the expansionary directives do not need any immediate course correction.

However, this logic is invalid, according to Chun, since the public finances will deplete at a rate far greater than the past few pandemic years.

“Income and wealth distribution between the older generation and the young remains wildly unresolved, as aided and exacerbated by fiscal policies thus far,” he said. “Measures to fortify fiscal soundness will entail extreme burdens on the young, especially since the amount shouldered will be enormous.”

Also advancing the view is Park No-wook, a senior researcher at Korea Institute of Public Finance, who called for a cap in per capita welfare benefits to better rein in snowballing government spending.

“Over 80 percent of tax revenue is earmarked for either mandatory spending or activities and projects defined by rigidity in nature, meaning they have little budgetary room to maneuver,” he said in the January issue of the institute’s report.

Included are state-run health care, employment insurance, industrial accident insurance and the national pension as well as regional government subsidies. The mandatory spending is guaranteed by law and therefore does not allow for a prompt revision. Also included are defense expenditures of 57 trillion won.

This leaves discretionary spending at 120 trillion won, only 18.3 percent of the revenue total of 656.6 trillion won.

“Budgetary overhaul will not be effective, if the revision is limited to 120 trillion won. The mandatory spending should be subject to fiscal structural reform,” Park noted.