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Experts advise corporate tax cut for fiscal normalization
By Lee Min-hyung
Korea's government debt-to-GDP ratio is expected to grow at the fastest pace among the world's 35 developed countries over the next five years, according to data from the International Monetary Fund (IMF).
In its recent Fiscal Monitor report, the IMF warned that the government debt-to-GDP ratio is projected to reach 66.7 percent in 2026. This is an increase of 15.4 percentage points from the end of 2021.
The pace of growth is the fastest among 35 countries which the financial institution classifies as developed countries. The Czech Republic came in second with a forecast of 8.7 percentage points growth during the same period, followed by Belgium, Singapore and Hong Kong.
This raises alarms for the local economy at a time when post-COVID-19 pandemic uncertainty remains. Despite the pessimistic outlook, the government is still sticking to expansionary budget spending, which experts argued will continue to boost the debt.
Given that Korea is one of the fastest aging societies in the world, economists have voiced the need for a complete revamp of Korea's economic and fiscal policies. They argue that the government should build a better environment for companies to do business here by expanding tax and infrastructure related benefits.
"Regardless of the steep rise in government debt, one of the best ways to foster a virtuous cycle for the economy is to make an environment where companies are willing to invest more and do business here," said Sejong University economist Kim Dae-jong.
The top corporate tax rate in Korea was 25 percent as of 2021, above the average of 22 percent for OECD member countries.
"The problem is that this will speed up corporate outflow amid a potentially increasing tax burden, leaving the government to collect less from them, which does not do the economy any good," he said.
Populist policies ― such as emergency relief funding due to the pandemic ― are another key factor aggravating the government's fiscal soundness, according to Kim.
"Debt at state-run enterprises as well as expanded budget spending will continue to pose a threat to the economy. The optimal way to offset losses from them is to build a win-win environment for private companies that can enjoy tax benefits and help revitalize the economy."
Officials from the nation's monetary and finance authorities declined to comment over any future policy direction regarding the surging government debt. But the heads of the authorities have pledged to "normalize" their expansionary stance after the pandemic.
Finance Minister Hong Nam-ki recently shared his willingness to make changes in fiscal policy after the pandemic crisis comes to an end.
"Korea's current government debt-to-GDP ratio is not as serious as the average of OECD member countries," Hong said during a National Assembly meeting last week.
"But as the ratio is rapidly rising each year, we need to normalize our fiscal policies when the COVID-19 crisis is under control," he said.
Bank of Korea (BOK) Governor Lee Ju-yeol also said the rapid increase in government debt was inevitable due to the uncontrollable external factors involving the pandemic.
"Growth in governments' debt has been a universal phenomenon due to the COVID-19 crisis," he said during an Assembly audit last month.
"But we need to carefully consider how to establish post-pandemic financial policies, as our aging population and low birthrate may be obstacles in the nation's fiscal management," he said.
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