Surplus possible next year on semiconductor-driven tax revenue gains

A notice at a store in Gyeongdong Market in Dongdaemun-gu, Seoul, informs customers that livelihood recovery consumption coupons are accepted, in September last year. [Herald DB]
A notice at a store in Gyeongdong Market in Dongdaemun-gu, Seoul, informs customers that livelihood recovery consumption coupons are accepted, in September last year. [Herald DB]

South Korea's combined public sector — covering the government and state-owned enterprises — posted a deficit of 83.1 trillion won ($60.2 billion) last year, the largest since records began, the Bank of Korea said Friday. The shortfall was driven by a surge in government spending tied to two rounds of supplementary budgets, though the central bank said a return to surplus is possible next year on the back of semiconductor-led tax revenue growth.

According to the Bank of Korea's preliminary 2025 public sector accounts released Friday, the public sector balance — total revenue minus total expenditure — came to a deficit of 83.1 trillion won, the widest gap since the statistics were first compiled in 2007.

The public sector encompasses general government, which includes the central government, local governments and social security funds, as well as public enterprises, both non-financial and financial.

Total public sector revenue rose 4.7 percent year on year to 1,192.1 trillion won, up from 1,139.1 trillion won in 2024. Although two benchmark interest rate cuts last year pushed market rates lower and reduced interest income, higher tax receipts and social contributions more than offset the decline.

Total expenditure climbed 5.5 percent to 1,275.2 trillion won from 1,208.1 trillion won in 2024, driven mainly by current transfers to the private sector and final consumption expenditure by the government.

Lee Hyeon-yeong, head of the Bank of Korea's expenditure national income team, said the government compiled two supplementary budgets to support livelihoods, including 13.5 trillion won in livelihood recovery consumption coupons, which sharply increased transfer payments to the private sector. "The new administration also pursued an active fiscal spending stance, and government consumption rose further due to preparations for the APEC summit and higher national health insurance benefit payments following the normalization of medical services," Lee said.

Because expenditure grew faster than revenue, the deficit widened from 69.1 trillion won to 83.1 trillion won in a single year. The public sector balance had been in surplus for six consecutive years from 2014 to 2019 before swinging to a deficit in 2020, when COVID-19 began — a streak of six consecutive years in the red.

Pandemic-related spending and soaring energy prices stemming from the war in Ukraine kept the balance in deficit from 2020 through 2022, while a drop in corporate tax revenue due to weak corporate earnings was the main drag in 2023 and 2024.

Lee said that for 2025, the main deficit drivers were transfer payments to the private sector on the government side and housing-related investment by public enterprises.

Breaking down the figures by sector, the central government deficit widened to 90.1 trillion won last year from 83.8 trillion won in 2024 — also a record since the statistics began. Tax revenue increased, but the shortfall deepened as transfer payments to the private sector for livelihood support expanded.

Local governments narrowed their combined deficit sharply, from 15.5 trillion won in 2024 to 2 trillion won last year, as grants received from the central government rose substantially.

The social security funds surplus shrank from 41.8 trillion won to 32 trillion won, as aging demographics caused social benefit payments from the government to grow faster than social contributions paid in.

As a result, the general government balance — covering the central government, local governments and social security funds — came to a deficit of 60.1 trillion won last year, with total revenue of 903.2 trillion won against total expenditure of 963.3 trillion won. That was wider than the 57.5 trillion won deficit in 2024 and also a record.

The general government balance as a share of nominal GDP stood at minus 2.2 percent last year, or minus 3.4 percent excluding social security funds — still better than the OECD member average of minus 4.4 percent, the Bank of Korea noted.

The public sector balance as a share of nominal GDP was minus 3.1 percent, or minus 4.3 percent excluding social security funds — better than the United Kingdom, Japan and Australia at minus 5.7 percent, but below Switzerland and Denmark at plus 0.5 percent.

Non-financial public enterprises, including Korea Electric Power Corporation and Korea Land and Housing Corporation, saw total revenue rise 0.5 percent to 231.9 trillion won and total expenditure increase 2.7 percent to 254.1 trillion won last year. Their combined deficit widened to 22.1 trillion won from 16.7 trillion won the previous year.

The wider deficit at non-financial public enterprises reflected a sharp increase in housing-related investment, including construction of public housing and purchases of rental housing.

Financial public enterprises, including Korea Development Bank and the Korea Housing Finance Corporation, saw total revenue fall 4.8 percent to 66.3 trillion won while total expenditure rose 4.1 percent to 67.1 trillion won.

As a result, financial public enterprises swung from a surplus of 5.1 trillion won in 2024 to a deficit of 900 billion won last year.

Although interest income rose and property income payments declined, current transfer payments by financial public enterprises to the state increased sharply.

Looking ahead, Lee said corporate and income tax revenues are expected to rise significantly this year on the back of a semiconductor boom. "We expect the deficit to narrow in 2026, led by general government, and there is a possibility of a return to surplus in 2027," he said. He added that increases in premium rates for the national pension and national health insurance would also slow the shrinkage of the social security funds surplus, providing a further boost to the overall fiscal balance.


kimstar@heraldcorp.com