The South Korean government plans to draw up to 16 trillion won from various funds, including the Exchange Equalization Fund (EEF)—often referred to as a “foreign exchange buffer”—to cover a tax revenue shortfall approaching 30 trillion won. This marks the second consecutive year the government has tapped the EEF, following last year’s record 56 trillion won deficit.
While the government asserts that the EEF has sufficient reserves, experts worry about drawing from funds intended to stabilize the foreign exchange market, especially amid growing global uncertainties like the U.S. presidential election and conflicts in the Middle East. Critics argue that relying on temporary measures sidesteps the underlying issues that caused the tax shortfall.
Despite these adjustments, South Korea’s budget deficit remains substantial, projected to reach 91.6 trillion won by year-end, based on the managed fiscal balance (a measure that excludes social safety fund balances). Although the government has pledged not to increase bond issuance this year, there are concerns that repeated reliance on bond sales to cover deficits could push the national debt above the projected 1,195.8 trillion won by year-end.
On Oct. 28, the Ministry of Economy and Finance announced plans to cover the 29.6 trillion won shortfall by drawing 4 to 6 trillion won from the EEF. Additional funds will come from the National Housing and Urban Fund (2 to 3 trillion won) and the Public Capital Management Fund (4 trillion won), bringing the total to around 14 to 16 trillion won. The government also plans to reduce 6.5 trillion won in transfers to local governments and education agencies by withholding portions of the Local Share Tax and Financial Grants for Local Education. Additionally, it anticipates that around 7 to 9 trillion won in projected expenditures will remain unspent, helping to offset the revenue gap.
Last year, the government faced criticism from academics and lawmakers after allocating 19 trillion won from the EEF to cover a record tax shortfall. Although Deputy Prime Minister Choi Sang-mok initially ruled out another EEF drawdown in a recent National Assembly briefing, the stance has since shifted.
A Ministry of Economy and Finance official pointed out that the EEF reserves in won remain adequate, as current foreign exchange interventions are focused on stabilizing the won against the strong dollar. The official cited the EEF’s end-of-2023 assets, totaling 274 trillion won, as justification for drawing 4 to 6 trillion won from it.
Some experts argue that the government’s reluctance to address structural tax issues—such as tax cuts—reflects a reliance on stopgap measures. The administration has pushed to eliminate the Financial Investment Income Tax and has maintained a Fuel Tax reduction since 2021. These measures have reduced annual tax revenue by 1.5 trillion won and resulted in over 13 trillion won in lost revenue by mid-2024.
“It is impractical to sustain a three-year Fuel Tax reduction given the nation’s fiscal constraints,” said Hong Ki-yong, a business professor at Incheon National University. Other critics point to repeated inaccuracies in the Ministry of Economy and Finance’s tax revenue forecasts, which have led to ongoing shortfalls. For instance, corporate tax revenue from January to September fell 23.8 trillion won below estimates due to unexpectedly poor corporate earnings.
“If tax revenue forecasts are off by tens of trillions, the government should acknowledge its miscalculation and issue bonds to create a supplementary budget,” said Kim Sang-bong, an economics professor at Hansung University. He criticized the reliance on EEF funds as a workaround. In an Oct. 28 National Assembly session, Deputy Prime Minister Choi reiterated his opposition to additional bond issuance, citing potential negative impacts on the country’s credit rating and future generations.
