NABO Fiscal Estimates & Tax Issues (Issue. 25)

Published on Dec., 21, 2023
Published by Estimates and Tax Coordination Division

I. Trends and Issues in Fiscal Estimates
 ·(NABO Medium-Term Fiscal Projection: 2023~2032) The forecasted results for the fiscal aggregates, based on the policies outlined in the government's 2024 budget bill and the 2023-2027 national fiscal operation plan, are as follows:
- Total revenues: (2023) 571.2 trillion won (25.8% of GDP) → (2032) 886.8 trillion won (27.7% of GDP) (average annual increase of 5.0%).
- Total expenditures: (2023) 607.6 trillion won (27.5% of GDP) → (2032) 921.4 trillion won (28.8% of GDP) (average annual increase of 4.7%)
- Overall fiscal balance: (2023) 36.4 trillion won deficit (△1.6% of GDP) → (2024) 50.6 trillion won deficit (△2.2% of GDP) → (2032) 34.7 trillion won deficit (△1.1% of GDP)
- National debt: (2023) 1,128.8 trillion won (51.1% of GDP) → (2032) 1,901.8 trillion won (59.4% of GDP) (average annual increase of 6.0%)
 ·(Analysis of job-seeking benefit-related legislation, overseas trends and their implications) Aligned with domestic and international trends in job-seeking benefits, it is essential for Korea's job-seeking benefit system to enhance its income guarantee function, which will involve addressing blind spots, extending the benefit period by broadening the application scope of employment insurance, and refining the adjustment of upper and lower limits for job-seeking benefits. Future job-seeking benefit systems must carefully consider these aspects to ensure increased effectiveness and substance.
 ·(Legislative trends and fiscal estimates for childbirth credit within the National Pension System) Estimates of a few scenarios that reflect the government's initiative to expand childbirth credit and the legislative trends of the National Assembly, indicate the following results: ① If the insured period, covered by the childbirth credit is extended, the annual average cost is projected to range between 2.1 and 8.0 trillion won in 2045-2093 (2023 constant price); ② If the timing of providing credit is shifted to the time of childbirth, the annual average cost is estimated to range between 1.1 and 2.5 trillion won in 2045-2093 (current price). In conclusion, the childbirth credit within the National Pension System needs to be improved by taking into consideration the fairness of support and the level of fiscal burden, adhering to the principle that future costs will be borne by the government.
 ·(Analysis of legislative trends and fiscal demand for support in natural disaster damage) Estimates, considering legislative trends aiming to enhance natural disaster damage support, indicate the following scenarios: ① If disaster relief payments are adjusted to reflect the inflation rate, the total fiscal demand is projected to be 88.1 billion won in 2024-2028; ② If support is provided for the operating profit loss and lease of small business owners affected by disaster damage, the total fiscal demand is estimated to range from 88.3 to 264.9 billion won in 2024-2028; and, ③ If mandatory subscription to storm and flood damage insurance for basement houses is enforced, with supported insurance premiums, it is anticipated that a total of 56.1 billion won in fiscal demand will be incurred in 2024-2028. Future improvements to the system should be explored, taking into account the effects and side effects of each support plan.

Ⅱ.Trends and Issues in Tax
 ·(Liquor taxation issues and international trends)  Korea's current liquor taxation system employs a unitary tax based on the shipment (import) amount for beer and rice wine, while other alcoholic beverages are subjected to an ad valorem tax based on the shipment (import) price. Discussions are underway regarding adjustments to the unitary tax rate to align with prices, enhance tax fairness between domestically produced and imported alcohol, and potentially transition to a specific tax on distilled alcohol. When contemplating revisions to the system, it is crucial to conduct a comprehensive study of the current status of liquor tax levies and reform trends in other countries.
 ·(Overseas trends in inflation-related tax policies)  As the global inflation rate reached 8.7% in 2022, the highest since 1996, countries worldwide, including G7 nations, have introduced windfall taxes in response or implemented policies such as tax reduction or tax rebate to alleviate household burdens.
 ·(R&D tax support status and international comparison)  The scale of tax support for R&D investment in the corporate sector in Korea and the effective tax rate borne by companies after tax support were found to be higher than the OECD average level. Additionally, to enhance the policy effectiveness of private R&D support, it is necessary to review ways to diversify government support methods, such as accelerated depreciation, incentives for patents, and temporary tax exemptions for large-scale R&D projects..
 ·(Problems and improvement measures of the tax subsidy rate limit system)  There are several issues with the current tax subsidy rate limit system: ① The existing tax subsidy limit system lacks legal enforceability; ② The performance of the tax subsidy rate exceeding the statutory limit for a given year (t) raises the statutory limit for the following year (t+1), creating a calculation method problem; and ③ The tax expenditure management system operates perfunctorily. To address these concerns, it is crucial to explore methods to give binding force to the tax subsidy rate limit system and adjust the method of calculating the statutory limit, etc.