The Korea Development Institute (KDI), a leading economic policy think tank, has released a report calling for tax hikes for the sake of fiscal soundness. According to the report titled ‘Evaluation of Fiscal Soundness and Policy Tasks,’ S. Korea’s fiscal soundness is in not so bad condition but has a chance of deteriorating to an alarming condition in the foreseeable future.
The KDI report points out that fiscal spending will increase owing to low childbirth rates and population aging while tax revenues will dwindle. It predicts that the share of social welfare spending in GDP would jump from 15.6 percent in 2011 to 34.0 percent in 2030.
Municipalities’ deteriorating fiscal conditions and public enterprises’ ballooning debts would also mar the nation’s fiscal soundness, according to the report. The solution is to first reduce tax exemption and tax cuts, expand social welfare contributions and gradually raise income taxes and excise duties, the report says.
When it comes to a tax reform, the government needs to expand sources of tax revenue before going about tax hikes and to streamline and simplify the taxation system, the report suggests. According to the report, a surtax increase could weigh down on people in the low income bracket forthwith but if the government used tax revenues from the surtax increase in strengthening the social safety net, it would serve as a means of income redistribution.
As municipalities rashly jumped at private-funded projects that accompany no short-term fiscal burden, long-term fiscal risks have arisen. Supervision over private–funded projects should be scaled up, the report says. Injecting a big dose of free-market competition into the market dominated by public enterprises or delegating public enterprises’ work to private companies could put a brake on their debt problems, according to the report.
To stop fiscal soundness from worsening, the tax burden ratio should be in the mid-20 percent range while the share of discretionary spending in GDP should be held at below 10 percent, the report points out.
Recalibrating the systems of local education grants, the national pension scheme and the national health insurance, the government should to seek to make the nation’s social welfare system half as good as those of North European nations and Germany, the report advises.
