Early Financial Execution Amid Sesu Punk... A Foreseen 'Red Signal'

Last Year's Fiscal Management Deficit of 54 Trillion Won
Low Growth and COVID Shock Combined Make This Year's Fiscal Deterioration Inevitable

[Sejong=Asia Economy Reporter Kim Hyun-jung] Last year, fiscal soundness indicators recorded the worst performance in history, and this year, the national debt has been snowballing since the beginning of the year. This is due to the Moon Jae-in administration's active fiscal spending to stimulate the economy amid a prolonged recession that has weakened the revenue base. Additionally, the adverse effects of the novel coronavirus disease (COVID-19) have compounded the situation, and with two supplementary budgets already enacted this year, the national finances are expected to become even more difficult.

According to the '2019 Fiscal Year National Settlement' announced by the government on the 7th, last year's managed fiscal balance showed a deficit of 54.4 trillion won, an increase of 43.8 trillion won compared to the previous year. The managed fiscal balance is the integrated fiscal balance (a deficit of 12 trillion won), which is total revenue minus total expenditure, excluding social security fund balances such as the National Pension and Employment Insurance (42.4 trillion won last year), and it best reflects the government's actual fiscal condition. This deficit is the largest in about 20 years since this indicator began to be compiled in 1990.

◆Last year's national finances, the largest deficit since statistics began= The scale of last year's national deficit was 10 trillion won more than the previous record of 43.2 trillion won recorded during the 2009 financial crisis. Relative to the gross domestic product (GDP), it was about -2.8%, which is also the largest since the financial crisis (-3.6%). Generally, a fiscal deficit ratio within ±0.5% of GDP is considered balanced. The integrated fiscal balance also recorded a deficit for the first time in four years since 2015 (-2 billion won). It shifted from a surplus of 31.2 trillion won in 2018 to a deficit of 12 trillion won last year. The integrated fiscal balance has recorded a deficit in the tens of trillions of won only three times: 1998 (-18.8 trillion won), 1999 (-13.1 trillion won), and 2009 (-17.6 trillion won).

Central and local government debt (D1) reached 728.8 trillion won, increasing by 48.3 trillion won from the previous year, surpassing 700 trillion won for the first time ever. However, the national debt ratio relative to GDP remained similar to the previous year at 38.1%. Last year's fiscal deficit was largely influenced by a sharp increase in expenditures outside of revenue and expenditure due to the transfer of the previous year's global surplus to local governments (10.5 trillion won). Additionally, worsening revenue conditions due to the recession and other factors caused a tax revenue shortfall. Last year's tax revenue was 1.3 trillion won less than initially expected due to decreased corporate tax from poor corporate performance, marking the first tax revenue shortfall in five years since 2014.

◆Red light on fiscal soundness from the beginning of the year... cumulative deficit of 30.9 trillion won in February= The problem is that the COVID-19 crisis has worsened conditions this year compared to last year. Fiscal conditions already showed a red light in February, when the impact of COVID-19 was not yet fully reflected.

According to the 'April Fiscal Trend' announced by the Ministry of Economy and Finance on the same day, as of the end of February, the cumulative integrated fiscal balance recorded a deficit of 26.2 trillion won, and the managed fiscal balance showed a deficit of 30.9 trillion won. At the end of February, national debt (central government basis) was 725.2 trillion won, an increase of 13.5 trillion won from the previous month, the largest monthly increase since the monthly fiscal trend report began in January 2014. This was largely due to the government's continued aggressive early fiscal spending policy, with total government expenditure in January and February increasing by 14.7 trillion won compared to the same period last year, reaching 104 trillion won. On the other hand, national tax revenue collected during the same period was 46.8 trillion won, 2.4 trillion won less than the previous year. February's national tax revenue alone was 10.3 trillion won, down 1.8 trillion won from the same month last year. A Ministry of Economy and Finance official explained, "This year's revenue was affected by the value-added tax filing deadline coinciding with the Lunar New Year and the impact of corporate tax refund claims. Institutional factors such as the extension of the comprehensive real estate tax payment period from two months to six months (for amounts over 2.5 million won) and contingent factors overlapped."

◆Supplementary budgets remain... worsening fiscal soundness expected= With large-scale fiscal spending anticipated this year due to supplementary budgets related to the COVID-19 crisis, the deterioration of fiscal soundness is seen as an inevitable step. Despite the obvious decline in tax revenue caused by low growth and the COVID-19 crisis, the government must focus on increasing welfare and consumption recovery expenditures this year.

Based on the first supplementary budget passed by the National Assembly last month, the managed fiscal deficit ratio relative to GDP exceeded 4% for the first time since the 1998 foreign exchange crisis (4.7%), and the national debt ratio relative to GDP rose to 41.2%. This already deviates from the government's targets stated in the '2019-2023 National Fiscal Management Plan,' which included a managed fiscal deficit ratio in the mid-3% range of GDP by 2023, a national debt ratio in the 40% range of GDP by 2021, and maintaining the national debt ratio within the mid-40% range of GDP by 2023.

Furthermore, with a third supplementary budget expected due to the COVID-19 crisis and major exporters, self-employed individuals, and small business owners pushed to the brink, a sharp decline in national tax revenue is anticipated. The government plans to defend fiscal soundness as much as possible through expenditure restructuring and additional management. A government official stated, "We will closely monitor the pace of debt increase and manage fiscal soundness more rigorously."

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