Disastrous populist pledges

Concerns grow amid record tax revenue shortfall

As the crucial general elections approach, rival political parties are taking flak for coming up with seemingly populist pledges designed to woo voters without genuinely considering how to finance them. Their move is all the more serious, stoking concerns of snowballing tax revenue shortfalls.

Korea suffered a record tax revenue shortfall of 51.9 trillion won ($38.92 billion) in 2023 compared to a year earlier, according to the Ministry of Economy and Finance. The ministry attributed the sharp fall in revenue to sluggish corporate earnings compounded by a property market slowdown. The government collected 344 trillion won in taxes last year, down 13.1 percent from 2022.

This marks a decrease of 56.4 trillion won from the government’s initial estimate and marks a twoyear consecutive shortfall in tax revenues. Paired with an economic recession, manufacturing sector output declined most drastically since the 1997 Asian financial crisis, mainly buffeted by lackluster overseas sales of semiconductors, Korea’s major export item.

Worse still, there have been few promising signs of a recovery this year. The National Assembly’s budget department projects state tax collection will decrease by about 6 trillion won from the government’s estimate this year. Regarding the reasons for the relatively pessimistic outlook, the Assembly cited, among others, lukewarm private consumption amid declining facility investments, plus a protracted recovery of the stock and real estate markets.

The Yoon Suk Yeol administration has pledged to drastically cut state spending to operate the national budget effectively. Despite such a promise, however, the state budget will likely turn red to about a 92 trillion won deficit this year should the current situation continue, according to research institutes.

Despite such financial challenges, rival political parties are hastily unveiling ambitious populist promises centered around the development of extensive infrastructure, social capital facilities, and financial aid programs, which all require a substantial amount of funding.

Korea’s rival parties are infamous for their readiness to compromise when it comes to projects that align with their shared political interests, setting aside their usual confrontational stance. For instance, they passed a special bill for the construction of a railway linking Daegu and Gwangju, two major cities representing the southeastern and southwestern provinces, respectively. The parties even agreed not to conduct preliminary feasibility studies for the project, even though the plan costs more than 6 trillion won.

The main opposition Democratic Party of Korea (DPK) also deserves further criticism for its attempt to legislate a law aimed at compensating farmers for potential losses resulting from the decrease in prices of key agricultural products, including rice, cabbages, radishes, chili peppers and onions. DPK leader Lee Jaemyung came under criticism for submitting a plan to provide parents of newborn babies with a huge amount of money and even pay for their graduation until they finish college. What matters is the fact that Lee and DPK have failed to mention how to fund the plan. “We plan to prepare the funding in the future,” Lee said.

Han Dong-hoon, interim leader of the ruling People Power Party (PPP), also invited criticism when he vowed to construct an underground railway in Suwon, Gyeonggi Province. The PPP is also poised to speed up the reconstruction of old apartments, extending the floor area ratio to a maximum of 750 percent from the current 300 percent.

It is worrying to see such a surge in pork-barrel pledges ahead of the April 10 general elections. State coffers cannot accommodate such expensive projects. Korea’s sovereign debt has already surpassed 1,100 trillion won, accounting for more than 50 percent of the nation’s gross domestic product (GDP). The budget deficit will likely exceed 3 percent of GDP next year. The sugar-coated pledges lacking feasible sources of funding will only aggravate the debt burden passed on to the next generation. Such a widening revenue shortfall and rising sovereign debt will only exacerbate the so-called “Korea discount,” forcing more foreign investors to leave the local market and cause the nation to lose momentum for future growth.