🚨 Tax Revenue Shortfall and Economic Recession Concerns: Government's Fiscal Dilemma and Economic Policy Direction

Today Korean Economic News | 2025.05.04

📌 First Quarter Tax Revenue Rate Falls...Concerns about Tax Shortfall for Third Consecutive Year

💬 This year's first quarter national tax revenue was 93.3 trillion won, with a progress rate of only 24.4% against the annual target. This is 0.8 percentage points lower than the same period last year, raising the possibility of tax revenue shortfall for the third consecutive year. The government acknowledges the downward pressure on tax revenue due to growth rate slowdown and external variables, and is exercising caution in fiscal management.

1️⃣ Easy to Understand

The government's tax revenue is lower than expected, putting fiscal management in the red. Let me explain in simple terms how this situation affects our economy and government policy.

In the first quarter (January-March) of this year, the government collected 93.3 trillion won in taxes, which is only 24.4% of the annual target. Normally, more than 25% should be collected in the first quarter, but this figure is below that threshold. At this rate, there's a high possibility that taxes will be collected less than planned this year as well, raising concerns about a "tax revenue shortfall" for the third consecutive year.

The main cause of lower tax collection is the economic downturn. In particular, the real estate market slump has caused a decrease in acquisition tax and capital gains tax, while deteriorating corporate performance has led to reduced corporate tax. Additionally, the strengthening of US protectionist policies and trade conflicts with China are also putting pressure on our economy.

In this situation, the government has compiled a supplementary budget of 12 trillion won, but economic experts predict that this scale will only raise the economic growth rate by 0.1 percentage points. However, to increase the size of the supplementary budget, government bonds would need to be issued, which could increase national debt and intensify upward pressure on interest rates, creating a policy dilemma.

Meanwhile, the semiconductor industry is recovering rapidly thanks to the AI boom, but the domestic economy remains sluggish, showing a pattern of "unbalanced growth." In particular, household consumption and corporate investment are shrinking, reducing the vitality of the domestic economy.

In this situation, the government is struggling to find a balance between securing tax revenue, stimulating the economy, and maintaining fiscal soundness. The direction of future economic policies will be an important variable for our economy's recovery and growth.

2️⃣ Economic Terms

📕 Tax Revenue Shortfall

Tax revenue shortfall refers to a state where actual tax collection is less than the government's expected tax revenue.

• If tax revenue falls short of expected amounts, it can disrupt government budget execution.
• It can occur due to various causes such as economic recession, tax system reform, and tax avoidance.

📕 Fiscal Soundness

Fiscal soundness is an indicator of how healthy a country's fiscal state is.

• It is mainly measured by the national debt ratio (national debt size as a percentage of GDP).
• Excessive national debt can increase the burden on future generations and lower a country's credit rating.

📕 Supplementary Budget

A supplementary budget is an additional budget compiled beyond the already established budget.

• It is compiled during economic crises, natural disasters, or urgent fiscal demands, and is finalized through deliberation and resolution by the National Assembly.
• It is used as a tool for expansionary fiscal policy during economic downturns to stimulate the economy.

📕 Domestic Demand

Domestic demand encompasses all consumption and investment that takes place within the country.

• It consists of household consumption expenditure, corporate facility investment, construction investment, etc.
• It is an important indicator of the domestic economy's basic strength; a stronger domestic demand leads to an economic structure more resistant to external shocks.

3️⃣ Principles and Economic Outlook

💡 Causes of Tax Revenue Shortfall and Fiscal Soundness Challenges

• Let's examine the causes of tax revenue shortfall and the resulting fiscal soundness challenges.

  • First, tax revenue shortfall is the result of a complex interaction between economic recession and industrial structure changes. The main causes of the continued tax revenue shortfall over the past three years are the economic recession following COVID-19 and the cooling of the real estate market. The decrease in housing transaction volume leading to reduced acquisition and capital gains taxes, and poor corporate performance leading to decreased corporate tax have particularly affected the first quarter tax revenue rate decline. Also, continued high interest rates have led to reduced consumption, resulting in decreased value-added tax revenue. Changes in industrial structure are also affecting tax revenue decrease. The transition to a digital economy and the expansion of non-face-to-face services are weakening existing tax bases, but new tax systems to address this are still inadequate.

  • Second, tax revenue shortfall is constraining the flexibility of fiscal operations. If tax revenue falls short of targets, the government must either reduce spending or issue deficit bonds. Currently, the government has compiled a supplementary budget of 12 trillion won, but considering the tax revenue shortfall, this could further expand the fiscal deficit. National debt is about 55% of GDP as of 2025, which is lower than the OECD average (about 110%) but is rapidly increasing. Considering the increase in welfare spending due to aging and the low-growth trend, fiscal capacity is gradually decreasing. The International Monetary Fund (IMF) and credit rating agencies have expressed concerns about Korea's fiscal soundness, and excessive government bond issuance could lead to a downgrade in the country's credit rating.

  • Third, the balance between maintaining fiscal soundness and stimulating the economy has become more important. In a situation of tax revenue shortfall, the government is struggling to find a balance between maintaining fiscal soundness and stimulating the economy. Active fiscal spending through a supplementary budget has a short-term economic stimulus effect but can lead to side effects such as increased national debt and upward pressure on interest rates. On the other hand, fiscal austerity could deepen the economic recession. To resolve this dilemma, strategies to increase the efficiency of fiscal spending and focus investment in areas with greater multiplier effects are needed. In the long term, it's necessary to seek fundamental solutions such as expanding tax bases through economic growth and strengthening tax revenue foundations through tax system improvements.

• Tax revenue shortfall can be seen not as a short-term phenomenon but as a structural problem, affecting the effectiveness and sustainability of fiscal policy. Therefore, along with short-term economic stimulus efforts, measures to enhance fiscal soundness from a mid to long-term perspective, such as expanding tax bases, tax system reform, and increasing fiscal spending efficiency, are needed.

💡 Policy Measures for Economic Stimulus and Their Effects

• Let's analyze various policy measures for economic stimulus and their effects.

  • First, fiscal spending expansion through a supplementary budget is a key tool for economic stimulus. The government is seeking to revitalize the economy through a supplementary budget of 12 trillion won. A significant portion of this will be invested in supporting small business owners and vulnerable groups, supporting export companies, and creating jobs. Theoretically, increased government spending contributes to economic growth through the "multiplier effect." However, the currently compiled 12 trillion won supplementary budget is only about 0.5% of annual GDP, expected to raise the growth rate by just 0.1 percentage points. Some experts argue that "a supplementary budget of at least 20 trillion won is needed," but this must be balanced with fiscal soundness. Raising funds through government bond issuance can lead to side effects such as rising market interest rates and reduced private investment due to the "crowding-out effect."

  • Second, interest rate cuts through monetary policy are also an important economic stimulus tool. Korea's current base rate is 3.25%, which was raised to respond to inflation after COVID-19. Interest rate cuts can stimulate consumption and investment by reducing investment costs for businesses and interest burdens for households. Low interest rates also have the effect of increasing consumption through the "asset effect" that raises the prices of assets such as stocks and real estate. However, the Bank of Korea needs a cautious approach considering the risk of foreign capital outflow, exchange rate instability, and resulting inflation due to widening interest rate differentials with the US. Especially considering Korea's high household debt level (about 104% of GDP), both the effects and side effects of interest rate cuts must be considered.

  • Third, structural reform and private investment activation are key to sustainable growth. As short-term fiscal and monetary policies have limitations in economic recovery, structural reforms such as regulatory reform, increased labor market flexibility, and fostering new growth industries are needed. Investment in future growth engines such as digital transformation, environmentally friendly energy, and biohealth is particularly important. The government should pursue tax benefits, financial support, and regulatory easing to induce private investment in these areas. It's also important to strengthen the domestic economy base by improving productivity in the service industry and strengthening the ecosystem for small businesses and startups. Ultimately, strengthening the economic constitution and raising growth potential is the key to long-term economic stimulus.

• For economic stimulus, fiscal policy, monetary policy, and structural reform must be harmoniously pursued. Balanced short-term stimulus measures and mid to long-term growth foundation building are needed for sustainable economic recovery. Especially in a situation of tax revenue shortfall, policies to increase fiscal spending efficiency and activate private investment become more important.

💡 External Environmental Changes and Korea's Economic Response Strategies

• Let's explore strategies for the Korean economy to respond to US protectionism and global economic slowdown.

  • First, US protectionist policies pose a significant challenge to Korean exports. The Trump administration's "America First" policy has imposed a 25% tariff on Korean products. This is higher than the rates for Japan (24%) and the EU (20%). Key export industries such as automobiles, semiconductors, and steel are being directly hit. The US is a major export market for Korea, and increased tariff burdens are deteriorating the price competitiveness and profitability of Korean companies. Additionally, with the reignition of the US-China trade conflict worsening the global trade environment, uncertainty in the Korean economy is growing. In this situation, Korean companies are responding through expanding local production, developing high-value-added products, and diversifying export markets.

  • Second, semiconductor-centered unbalanced growth reveals the vulnerability of the economy. Recently, the semiconductor industry has been recovering rapidly thanks to the AI boom, greatly contributing to the increase in Korean exports and industrial production. Semiconductor production in March increased by 47.5% compared to the same month last year, and exports increased by 35.2%. However, construction and service industry production decreased, and retail sales and facility investment remained sluggish, showing that the domestic economy still lacks vitality. This unbalanced growth shows the structural vulnerability of the Korean economy, which has a high dependence on specific industries. Therefore, efforts to secure various future growth engines such as secondary batteries, bio, and aerospace, rather than settling for the semiconductor boom, are needed.

  • Third, a comprehensive strategy to strengthen the Korean economy's constitution is needed. The Korean economy, with its high dependence on external factors, is inevitably vulnerable to changes in the global environment. Therefore, it's necessary to strengthen the economic constitution through industrial structure diversification, reinforcement of domestic demand, and enhancement of technological competitiveness. Especially, it's important to expand R&D investment in future growth engines such as AI, environmentally friendly energy, and bio, and accelerate digital transformation. Also, strengthening the development of emerging markets such as India, ASEAN, and the Middle East for export market diversification, and reorganizing global production networks to respond to geopolitical risks are needed. Above all, efforts to increase the vitality of the domestic economy through service industry development via regulatory reform, strengthening the ecosystem for small businesses and startups, and expanding the consumption base through income growth are needed.

• The Korean economy faces external challenges such as US protectionism and global economic slowdown. In this environment, industrial structure diversification, domestic demand reinforcement, and securing technological leadership for strengthening the economic constitution are essential for sustainable growth. Especially, efforts to reduce dependence on specific industries and markets and discover new growth engines are important.

4️⃣ In Conclusion

The Korean economy faces complex challenges including tax revenue shortfall, semiconductor-centered unbalanced growth, and US protectionism. As the first quarter tax revenue rate remains at 24.4%, concerns about tax revenue shortfall for the third consecutive year are growing, acting as a constraint on the government's fiscal operations.

The government is seeking to stimulate the economy through a supplementary budget of 12 trillion won, but in a situation of tax revenue shortfall, expanding fiscal spending can lead to side effects such as increased national debt and upward pressure on interest rates. Therefore, finding a balance between maintaining fiscal soundness and stimulating the economy is emerging as an important task.

Meanwhile, while the semiconductor industry is recovering rapidly thanks to the AI boom, the domestic economy remains sluggish. This unbalanced growth may help improve economic indicators in the short term but can weaken the stability and resilience of the economy in the long term.

Additionally, the strengthening of US protectionism and the reignition of the US-China trade conflict are deteriorating the global trade environment. Especially, the 25% high tariff on Korean products is severely impacting key export industries such as automobiles, semiconductors, and steel.

To respond to these complex challenges, short-term economic stimulus efforts along with mid to long-term perspective economic constitution strengthening are needed. Particularly, improving fiscal spending efficiency, diversifying industrial structure, reinforcing domestic demand, and enhancing technological competitiveness are needed to build a sustainable growth foundation.

Ultimately, the future of the Korean economy depends on how current crises are turned into opportunities. It's time to build an economic system that is strong against internal and external shocks through short-term economic stimulus measures along with securing mid to long-term growth engines and economic structure reform.