The Ministry of Economy and Finance recently announced plans to address a projected 29.6 trillion won ($2.1 billion) tax revenue shortfall this year by tapping into up to 16 trillion won from various funds, including 4-6 trillion won from the Foreign Exchange Stabilization Fund, 4 trillion won from the Public Capital Management Fund, and 2-3 trillion won from the Housing and Urban Fund. The ministry also intends to suspend 6.5 trillion won in local government grants and local education grants while covering the remainder of the deficit with 7-9 trillion won from unspent budget funds.
The Exchange Stabilization Fund serves as a forex buffer, helping to stabilize the exchange rate by buying or selling dollars or won during significant fluctuations. The government already drew 20 trillion won from the fund last year to offset a tax shortfall and plans to tap into it again this year. Just last month, Choi Sang-mok, the Deputy Prime Minister and Minister of Economy and Finance, said, “We are not considering any changes to the Foreign Exchange Stabilization Fund’s management at this stage.” But a month later, the ministry reversed this stance.
While South Korea’s foreign exchange reserves rank ninth in the world, surpassing $400 billion, the government’s reliance on this fund to cover tax revenue shortfalls is concerning. Drawing on these reserves due to insufficient tax revenue seems unwise for a country that once faced a foreign exchange crisis.
The Yoon administration has made fiscal soundness a central government agenda, frequently criticizing the previous Moon administration for excessive borrowing and spending despite surplus tax revenues. Yet, it has failed to uphold so-called fiscal prudence. When preparing this year’s budget, the government anticipated a 33 trillion won decrease in tax revenue compared to last year but still allocated a deficit budget with expenditures exceeding income by 92 trillion won.
This budget included various policies, including raising monthly soldier salaries from 1.35 million won to 1.65 million won, increasing monthly subsidies for parents with infants to 1 million won from 700,000 won, raising the basic pension for 70% of elderly citizens to 334,000 won, and boosting the number of part-time jobs for seniors to a record-high of 1.03 million. To reduce borrowing by issuing additional government bonds, the administration is now attempting to cover the tax shortfall through various funds.
President Yoon Suk-yeol claimed in an August national briefing that “the country’s finances are stronger due to our steadfast adherence to a sound fiscal policy.” The national debt is projected to rise by 210 trillion won within three years under the Yoon administration. During the Moon administration, the national debt surged by over 400 trillion won in five years. Given the debt growth trajectory, the current administration’s approach does not seem any different.
