Tax Revenue Surges by 69 Trillion Won, but Government Debt Tops 1,372 Trillion Won

The South Korean national flag and government flag fly outside the Central Government Complex in Sejong. South Korea’s fiscal deficit narrowed to roughly half its level a year earlier as national tax revenue surged on the back of improved corporate earnings and a buoyant stock market. Corporate tax receipts led the recovery, bringing the managed fiscal balance deficit to its lowest level in eight years, even as government debt continued to climb. According to the October edition of Monthly Fiscal Trends, released by the Ministry of Planning and Budget on Oct. 15, the managed fiscal balance recorded a deficit of 43 trillion won, or $32.03 billion, from January through August this year. This marked an improvement of 45.3 trillion won from the 88.3 trillion won deficit posted over the same period last year. The managed fiscal balance excludes the four major social security funds, including the National Pension and Employment Insurance funds, from the consolidated fiscal balance and is used to assess the government’s underlying fiscal position. The improvement was driven by a sharp increase in tax revenue. Cumulative national tax receipts through August reached 329.9 trillion won, up 69.1 trillion won from a year earlier. This represented 79.4% of the annual target of 415.4 trillion won set under this year’s supplementary budget, a collection rate 9.7 percentage points higher than that recorded over the same period last year. Corporate tax made the largest contribution to the increase. As corporate earnings improved, corporate tax revenue rose by 28.2 trillion won year on year to 91.6 trillion won. In August alone, corporate tax receipts increased by 23.8 trillion won, accounting for a substantial share of the overall growth in national tax revenue. Income tax revenue also climbed by 14.4 trillion won to 101.1 trillion won, supported by increased performance bonuses and a rise in real estate transactions. The securities transaction tax increased by 7 trillion won, while the special tax for rural development, which is linked to financial transactions, rose by 9.5 trillion won. Both benefited from higher stock market trading volumes and the effects of restored tax rates. Value-added tax revenue also increased by 7.4 trillion won, reflecting growth in private consumption and imports. Total revenue reached 529.7 trillion won, up 98 trillion won from a year earlier, while total expenditure rose by 39.3 trillion won to 524.7 trillion won. With revenue growth substantially outpacing expenditure growth, the consolidated fiscal balance swung from a deficit of 53.7 trillion won last year to a surplus of 5 trillion won this year. Despite the improvement in the fiscal balance, central government debt continued to rise. At the end of August, the debt stood at 1,372.1 trillion won, up 17.9 trillion won from the previous month. Compared with the end of last year, it had increased by 104 trillion won in just eight months. The increase reflected Treasury bond issuance far exceeding redemptions. Through August, the government issued 163.6 trillion won in Treasury bonds, while redemptions totaled 61.5 trillion won, resulting in a net increase of 102.1 trillion won in outstanding bonds. The outstanding balance of Foreign Exchange Stabilization Fund bonds also rose by 4.7 trillion won, adding to the government’s debt burden. Government borrowing conditions are also becoming more challenging. The average yield on government bond issuance rose to 4.25% in September, up 0.15 percentage points from the previous month. Meanwhile, foreign investors’ holdings of Korean Treasury bonds fell by 3.7 trillion won to 319.6 trillion won. Although stronger tax revenue has eased near-term deficit pressures, rising borrowing costs and the continued accumulation of debt remain challenges for fiscal management.