[Q&A] "Fiscal Deficit Hits 54.4 Trillion Won, Largest Ever... Impact of Economic and Fiscal Scale Expansion"

"Decrease in Pension Liability Increase, Use of New Indicators Such as Inflation, Wage Growth, and Population Variables"

[Asia Economy Reporter Jang Sehee] The Ministry of Economy and Finance explained that the record deficit of 54.4 trillion won in the managed fiscal balance last year was due to "the overall growth of the economy and fiscal scale."

On the 6th, Kang Mija, Director of Fiscal Soundness at the Ministry of Economy and Finance, stated at a pre-briefing held at the Government Complex Sejong a day before the review of the '2019 Fiscal Year National Settlement' that "In terms of scale, the managed fiscal balance deficit was the largest in 2019, which is because the economy and fiscal scale themselves have continued to grow." She also cited deteriorating revenue conditions and an expansionary fiscal policy stance as other reasons behind the fiscal deficit.

The managed fiscal balance is the figure obtained by subtracting total expenditures and social security funds from total revenues, reflecting the government's actual fiscal condition. The managed fiscal balance for the 2019 fiscal year (a deficit of 54.4 trillion won) increased by 10.6 trillion won compared to the previous year.

Kang added, "Compared to the IMF foreign exchange crisis and the global financial crisis, the ratio relative to Gross Domestic Product (GDP) can be considered smaller." The managed fiscal balance deficit ratios were ▲-4.6% of GDP in 1998 (IMF foreign exchange crisis) and ▲-3.6% of GDP in 2009 (global financial crisis).

Below is a Q&A session with Director Kang of Fiscal Soundness and Director Kim Seongil of Accounting and Settlement.

▲Both the integrated and managed fiscal balances turned to deficits.

=Kang/The managed fiscal balance shows the largest deficit since the IMF foreign exchange crisis in 1997-1998 and the global financial crisis in 2009. In terms of scale, last year had the largest deficit. However, since the economy and fiscal scale themselves are growing, the ratio relative to GDP is smaller compared to the IMF and global financial crises. The largest reason for the managed fiscal balance deficit was the large amount of 10.5 trillion won related to the settlement of local government grants and local allocation taxes during the processing of surplus funds from excess tax revenues. This had the greatest impact. The integrated fiscal balance also recorded a deficit again for the first time since the two previous crises.

▲The increase in pension liabilities has sharply decreased.

=Kim/When calculating pension liabilities, we estimate future pension amounts and convert them to present value. For estimating future pension amounts, we use long-term wage and inflation growth rate forecasts. Until the 2018 fiscal year, we used the wage and inflation growth rates from the 2015 Long-term Fiscal Outlook. However, since those indicators were based on forecasts announced long ago, we adjusted them to reflect recent economic realities. Currently, with the ongoing low inflation trend, inflation growth rates from 2021 to 2030 are projected to be below 1%, yet the previous forecast was 2.4% to 2.7%. Wage growth was also projected at over 5%, which was an excessively high forecast and needed to be made more realistic. We used the figures decided at the Long-term Fiscal Outlook Council in early February this year. Accounting experts agreed that using the 2020 Long-term Fiscal Outlook figures was appropriate. Due to changes in wage and inflation growth rates, the increase in pension liabilities was somewhat smaller.

▲In the past, was there any case where pension liabilities were calculated using long-term fiscal outlook figures even though such data had not been published?

=Kim/There was no such case. The National Finance Act has been in effect since 2011, and the long-term fiscal outlook has been used since the 2015 settlement, so it is not appropriate to consider past cases. Accounting experts also opined that using outdated forecasts that do not reflect current market conditions is problematic from an accounting perspective. Since this is an internal administrative procedure, it was confirmed that it is appropriate to apply data with high reliability when available.

▲Is it correct that the managed fiscal balance deficit ratio relative to GDP is the largest since 2009 (3.8%)?

=Kang/Since the scale of Korea's economy and fiscal operations is growing, it is more accurate to look at the ratio relative to GDP. The managed fiscal balance deficit ratio is indeed the largest since 2009. This is because a large amount, about 10 trillion won, was transferred to local governments.

▲Besides inflation and wage growth rates, what other forecasts were changed at the February Long-term Fiscal Outlook Council?

=Kim/Since the previous long-term fiscal outlook was the 2015 version, most macroeconomic assumptions have changed. Variables such as population, age composition, employment statistics, inflation, and capital stock have almost all been updated. The Long-term Fiscal Outlook Council consists of related ministries and external experts.

▲Why was the central government debt figure changed from 704 trillion won to 699 trillion won in the fiscal trend report?

=Kang/There can be slight variations between settlement figures and the amounts disbursed at any given time. When we prepare budgets or supplementary budgets, the expected scale and the actual debt issuance can differ slightly. This is because the scale of government bond issuance changes during the National Assembly's deliberation process. I want to clarify that the government has not newly prepared or reduced the scale of national debt issuance on its own.

This content was produced with the assistance of AI translation services.