❑ Overview
   ◦ In the government’s 2025 Tax Expenditure Budget, national tax reductions are forecast to total KRW 78.0 trillion, an increase of KRW 6.6 trillion (9.2%) YoY from KRW 71.4 trillion.
   ◦ NABO projects the 2025 national tax reduction rate to reach 16.0%, exceeding the statutory limit of 15.5% by 0.5%p.
    － Excess of national tax reduction rate over the statutory limit based on the government’s proposal (%p): (2023) 1.5, (2024e) 0.7, (2025e) 0.7
    － Excess of national tax reduction rate over the statutory limit based on NABO’s projection (%p): (2023) 1.5, (2024e) 1.7, (2025e) 0.5
    ※ Statutory limit of the national tax reduction rate: Average of the national tax reduction rates for the previous three years + 0.5%p

❑ Highlights of the 2025 Tax Expenditure Budget Analysis
   ◦ Lump-sum analysis
    － (Lump-Sum) Of the total fiscal expenditure (sum of tax and fiscal expenditures) of KRW 755.4 trillion for 2025, tax expenditure accounts for 10.3%, reaching its highest proportion in the past 10 years.
     ※ During the COVID-19 pandemic, the proportion of tax expenditure to total fiscal expenditure decreased from 8.8% in 2019 to 8.5% in 2020 due to increased fiscal spending. However, since the end of the pandemic, the share of tax expenditure has been rising.
    － (12 Major Areas) The 2025 tax expenditure budget for four key areas (health, welfare, and employment; agriculture, forestry, fisheries, and food; industry, SMEs, and energy; and R&D) totals KRW 66.5 trillion, accounting for 85.3% of total tax expenditure. This highlights the active use of tax expenditure in Korea as a policy tool to achieve specific social and economic goals.
   ◦ Analysis of tax expenditures for the R&D sector
    － (Current Status) The government’s 2025 Tax Expenditure Budget outlines national tax reductions across 12 sectors. However, the amounts are inconsistent with the total national tax reduction figure, and detailed information on specific tax expenditure items in the R&D sector is not provided.
    － (Improvement Plan) It is essential to establish reasonable standards to improve the accuracy of tax expenditure information and explore measures to enhance the effectiveness of tax expenditures in the R&D sector.
   ◦ Analysis of the national tax reduction rate limit
    － (Current Status) The national tax reduction rates based on NABO’s forecasts for national tax revenues in 2024 and 2025 are projected at 16.3% and 16.0%, respectively, exceeding the statutory limit for three consecutive years since 2023. This suggests that the current system for managing the national tax reduction rate is insufficient to effectively control the increase in tax expenditure.
    ※ Excess over the statutory limit for the national tax reduction rate (%p): (2023) 1.5, (2024e) 1.7, (2025e) 0.5
    － (Improvement Plan) When the national tax reduction rate exceeds the statutory limit, measures must be implemented to manage the rate, such as establishing standards for adjusting tax expenditures and revising specific tax expenditure items.
   ◦ Beneficiary allocation analysis
    － (Current Status) The beneficiary classification standards and methods need to be improved to ensure that current tax expenditure allocation information accurately reflects the actual distribution of tax reductions.
    － (Improvement Plan) Beneficiary classification standards should be refined to assess whether the recipients of tax expenditures align with the intended objectives of the tax incentives. Furthermore, detailed beneficiary allocation information should be provided for tax expenditure items where the scope of tax reductions is expanded or sunset provisions are repeatedly extended.
   ◦ Tax expenditure adjustment analysis
    － (Current Status) Efforts to adjust tax expenditures remain insufficient, with inconsistencies in the criteria for measuring tax expenditure adjustment performance and the repetitive extensions of sunset periods for items that require active adjustment.
    ※ Ratio of items with sunset periods extended four times or more: (Active) 40. 5%, (Potential) 31. 7%
    － (Improvement Plan) Consistent standards for tax expenditure adjustment need to be established, including the creation, abolition, and redesign of relevant systems. Efforts should also be strengthened by reclassifying management target types and developing specific management plans for each type.

❑ Issue Analysis for Tax Expenditure Budgeting
   ◦ Enhancing the tax expenditure performance evaluation system
    － (Current Status) The effectiveness of the tax expenditure performance evaluation system is undermined due to the continued exemptions from preliminary feasibility assessments and the limited use of in-depth evaluations.
    － (Improvement Plan) Measures should be developed to improve the usability of in-depth evaluation results for tax exceptions. This includes narrowing the scope of exemptions from preliminary feasibility assessments, strengthening follow-up management for exempt items, enhancing the analysis of goal achievement, and clearly presenting evaluation results.
   ◦ Developing a plan for the integrated management of national and local tax expenditures
    － (Current Status) The existing management system for national and local tax expenditures is insufficient as a foundation for identifying, managing, and controlling lump-sum national tax expenditure.
    － (Improvement Plan) In the short term, the reporting methods for national and local tax expenditures should be unified to enable the identification of lump-sum national tax expenditure. In the medium to long term, a system for comprehensive management and oversight of national tax expenditure should be established.