South Korea's government pulled 32 trillion won ($22 billion) out of public funds in ways that circumvented parliamentary review in order to plug 87 trillion won in tax revenue shortfalls that emerged in 2023 and 2024, the Board of Audit and Inspection said. The borrowing left 24.5 trillion won that must be repaid by 2034, along with annual interest averaging 833 billion won, a burden the audit board said has been pushed onto future budgets.
The board released the findings on the 27th in an audit titled "Operation of Major Fiscal Management Systems, with a Focus on Revenue Management." The audit found that the Ministry of Economy and Finance — now split into the Ministry of Finance and Economy and the Ministry of Planning and Budget — moved 17.3 trillion won from the foreign exchange stabilization fund in 2023 and 15 trillion won from 10 funds including the housing and urban fund in 2024 into the general account by way of the public capital management fund, using the money to cover the revenue gap.
The audit board concluded that the ministry chose a workaround to avoid legislative review. Under the National Finance Act, changes of more than 20% to a fund's spending plan require approval from the National Assembly. The ministry lent additional money up to the 20% ceiling that can be altered without review, then deferred collection of existing loans for the remainder.
In 2024, the housing and urban fund lent an additional 2.07 trillion won to the public capital management fund and deferred repayment of 1.11 trillion won it had been due to receive back. That moved 3.18 trillion won, or 30.7% of the original spending plan, into the public capital management fund without parliamentary review. In 2023, the public capital management fund lent an additional 9.6 trillion won to the general account and deferred repayment of 7.7 trillion won it had been due to collect, transferring 17.3 trillion won, or 36% of the original spending plan.
Because of these internal transactions, the general account must repay the 24.5 trillion won borrowed from the public capital management fund by 2034 and will carry annual interest averaging 833 billion won, the audit board said.
Local governments also absorbed part of the cost of the shortfall. The ministry withheld 8.2 trillion won in local allocation tax grants in 2023 and 2.2 trillion won in 2024. Under the Local Allocation Tax Act, the government is required to disburse 19.24% of projected internal tax revenue up front each year and settle any gap against actual collections the following year, but the ministry withheld the money without consulting local governments. As a result, 66 local governments cut spending in the first year and 50 did so in the second, and local bond issuance over the two years came in 1.3 trillion won above plan.
The forecasting errors that widened the shortfalls stemmed largely from flaws in the estimation model itself rather than from swings in the economy. Revenue forecasting errors averaged 51.5 trillion won a year from 2021 to 2024, the audit board said. Errors averaged 21.7 trillion won a year for corporate income tax and 11.9 trillion won for capital gains tax on property transfers. "Of the errors in those two tax categories, only 19% stemmed from forecasts of economic cycles, while 81% came from errors in the estimation model itself," the board said.
In estimating 2023 corporate tax revenue, the ministry applied the historical average pretax profit margin even though corporate earnings were likely to fall because of factors including the war between Russia and Ukraine. For 2024, it failed to properly account for the effect of exempting dividends from overseas subsidiaries from taxation. Those and other factors produced corporate tax model errors of 20.4 trillion won and 11.9 trillion won in the two years.
In estimating capital gains tax on property transfers, the model also reflected the effect of changes in home prices and transaction volumes in a way that diverged from actual statistics. When the audit board recalculated using a corrected model, the error fell to 3.1 trillion won from 7 trillion won for 2023 and to 1.6 trillion won from 4 trillion won for 2024, reductions of 55% and 60%. Adjusting the 2024 corporate tax model to reflect the effect of tax law revisions narrowed its error by 45%.
The audit board notified the Ministry of Finance and Economy and the Ministry of Planning and Budget to establish procedures for reporting to the National Assembly and consulting local governments when responding to revenue shortfalls through internal transactions between funds and accounts. It also directed the Ministry of Finance and Economy to draw up measures to improve the accuracy of its revenue estimation models by reflecting economic cycles, the effects of tax law revisions and the statistical relationship with actual collections.