Bloomberg News

South Korea Tax Shortfall Poses Fiscal Cliff Risk, Adviser Says

March 29, 2013

South Korea may face a 12 trillion won ($10.8 billion) tax revenue shortfall this year as economic growth slows, and the government may need to issue bonds to avoid its own fiscal cliff, a presidential adviser said.

“If the revenue shortfall is left unaddressed, we may see a Korean version of the fiscal cliff in the second half of this year,” South Korea’s chief presidential economy adviser Cho Won Dong said today in Seoul. The government must issue bonds to afford the planned expenditures and avoid the kind of “mandatory budget cuts that the U.S. economy is now suffering from,” he said. Cho didn’t give the value of bonds to be sold.

The government yesterday lowered its 2013 growth outlook to 2.3 percent from 3 percent and said it will introduce a stimulus package next month to boost an economy grappling with a strong won that’s harming exports. Political opposition is mounting against President Park Geun Hye’s pledge to fund the stimulus without levying new taxes.

“The government may be overestimating the downside risk by cutting the growth projection to 2.3 percent while emphasizing worries of a tax shortfall, which would help justify a stimulus,” Kwon Young Sun, a Nomura International Ltd. economist said by phone today.

Slower growth wasn’t reflected in the national tax revenue projections and the government’s approved budget for 2013, Cho said. Details on the size of the stimulus plan will be announced after discussions with the legislature, he said.

The government is pushing for more than 60 percent of this year’s 342 trillion won budget to be spent in the first half. That’s not enough to overcome the present fiscal and economic challenges, Cho said.

Inevitable

Park’s economic growth reduction was a “gimmick” to build public support around the need for a stimulus, the main opposition Democratic United Party said today in an e-mailed statement. While issuing bonds may be inevitable to finance a stimulus, takes must also be raised on big businesses and high- income earners to safeguard fiscal soundness, the DUP said.

Park’s planned supplementary budget requires approval from the 300-seat National Assembly. President Park’s ruling New Frontier Party holds a majority with 152 seats over the DUP’s 127 lawmakers.

The government’s lower economic forecast and warnings of revenue shortfall may add pressure on the central bank to lower the benchmark interest rate, Nomura’s Kwon said. The Bank of Korea kept the seven-day repurchase rate unchanged at 2.75 percent on March 14. It last lowered rates in October.

“We maintain our call that the BOK will keep rates unchanged at 2.75 percent through 2013 as it seeks a balance between the benefits and cost of further monetary easing,” Kwon said. “Still, there’s possibility of a forced rate cut in this climate, with the pressure from the government.”

To contact the reporters on this story: Sangwon Yoon in Seoul at syoon32@bloomberg.net; Cynthia Kim in Seoul at ckim170@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net


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