2016-2020 Tax Revenue Outlook
October 13, 2016
Tax revenue in 2016 is expected to reach KRW 237.0 trillion, increasing by KRW 19.1 trillion (+8.8%) YOY and exceeding the supplementary budget (KRW 232.7 trillion) by KRW 4.3 trillion. Income tax has staged a solid upward trajectory thanks to the booming asset market, and corporate tax revenues are also forecast to rebound from setbacks with a high growth of 16.9%, driven by operating profit growth of firms. Tax revenue is projected to grow 8.8%, furthering the upward trend from 2015 (6.0%) with more than double the nominal GDP growth (4.0%).
NABO forecasts that tax revenue in 2017 will grow 3.0% YOY to reach KRW 244.2 trillion, KRW 2.5 trillion higher than the government’s estimates of KRW 241.8 trillion. While growth in the asset market is expected to slow and retreat from the boom in 2016 (8.8%→3.0%) as a reactionary fall, tax revenue is estimated to exceed the government’s proposal with the rise in corporate tax revenue from strong business performance and the relatively high base effect carried over from 2016. Revenue from income tax and corporate tax is expected to exceed the government estimates by KRW 2.8 trillion and KRW 0.3 trillion, respectively, based on solid growth of the former and increases in the latter from strong business in 2016.
Given the risk of slowdown in the asset market in the medium term, there is high potential for tax revenue from 2016 through 2020 to be lower than the government estimates. Household insolvency due to debt, and concerns over housing oversupply would blunt the effects of the asset market in the medium term, which has recently led the favorable trend in revenue, if interest rate hikes. Given these risks, NABO predicts the annual growth rate of tax revenue for 2016-2020 at 3.9%, lower than the government’s forecast of 4.5%.
In light of this, the financial authorities need to consider in future fiscal operations that the recent growth in revenue is not a cyclical pattern but a deviation from the trend, attributed to temporary factors like strong growth in the asset market. Once interest rate hikes materialize, followed by a asset market downturn, revenue conditions could quickly deteriorate. As the negative effects from business restructuring spread domestically and uncertainties regarding China and over the global economy continue to grow on the international scene, sustained effort should be made to maintain fiscal soundness and enhance resilience against unexpected internal and external shocks.