[3rd Supplementary Budget] National Debt Increases by 100 Trillion Won This Year Alone... "Fiscal Rules Must Be Established"

Largest Supplementary Budget Ever Signals Fiscal Red Alert
Deputy Prime Minister Hong Nam-gi: "Debt Ratio Is Healthy, but Speed Warrants Caution"
Calls for Fiscal Rules Arise Everywhere... Expected to Be Proposed in the 21st National Assembly

[Sejong=Asia Economy Reporters Kim Hyunjung and Jang Sehee] As the government embarks on the largest supplementary budget (supplementary budget) ever to respond to the novel coronavirus infection (COVID-19) crisis, the national debt is set to increase by nearly 100 trillion won this year alone. While proactive support is inevitable to avoid missing the golden time for fiscal input, which could lead to a prolonged recession, there are calls for parallel discussions on fiscal soundness, including the establishment of separate fiscal rules.

Reflecting the 3rd supplementary budget (35.3 trillion won) announced by the government on the 3rd, South Korea's national debt stands at 840.2 trillion won, reaching 43.5% of the Gross Domestic Product (GDP). Compared to last year, it has increased by 99.4 trillion won within one year.

◆ Fiscal Red Light... Worst Fiscal Balance Since Statistics Began = Under the expansionary fiscal policy of the Moon Jae-in administration, the national debt ratio has been soaring. It rose from 35.9% in 2018 to 37.1% last year, reached 39.8% with this year's budget, and surged to 43.5% after the 1st to 3rd supplementary budgets due to COVID-19.

The integrated fiscal balance, which is total national revenue minus expenditure, shows a deficit of 76.4 trillion won, equivalent to -4.0% of GDP, marking the worst deterioration since related statistics began in 1979. The managed fiscal balance, which excludes social security funds from the integrated fiscal balance, shows a deficit of 112.2 trillion won. This indicator, which best reflects the government's fiscal situation, also marks the largest deficit since statistics began in 2001.

However, it is difficult to say that the national fiscal indicators are at an absolute risk level. The average national debt ratio among OECD countries reaches 110%. The OECD sets fiscal soundness standards as maintaining a national debt ratio within 60% and a fiscal deficit within 3%. The problem lies in the speed. Considering the current situation where economic growth momentum is lost due to the combined effects of economic downturn and COVID-19, the GDP, which is the denominator in the national debt ratio calculation, is shrinking while the debt amount, the numerator, is increasing, causing the rise to be steeper than expected. Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, also explained at a briefing on the 3rd supplementary budget on the 29th, "We judge that the national debt ratio relative to GDP is relatively fiscally sound and favorable compared to OECD countries," but added, "However, we are quite cautious about the speed of increase."

◆ Concerns Over Tax Revenue Shortfall Despite Largest Ever Revenue Revision = The government has carried out the largest-ever revenue revision of 11.4 trillion won in the 3rd supplementary budget. This revenue revision exceeds the 11.2 trillion won during the 2008 financial crisis and the 8.6 trillion won during the 1998 foreign exchange crisis.

Due to COVID-19, the deterioration of corporate performance is expected to directly lead to a decrease in corporate tax revenue, making additional revenue revisions inevitable. According to an analysis by Rep. Chu Kyung-ho of the United Future Party on the progress rate of national tax revenue, tax deferrals, and tax law revisions, national tax revenue this year is expected to reach only 272.8 trillion won. This is 18.4 trillion won less than the 291.2 trillion won revenue anticipated in the 1st supplementary budget.

The Ministry of Economy and Finance expects that while corporate tax revenue will decrease, capital gains tax, securities transaction tax, interest income, dividend income, and inheritance tax will increase. They maintain that there will be no further revenue revisions. However, some worry that the scale of the tax revenue shortfall will far exceed the government's forecast. For example, the Ministry of Economy and Finance projected corporate tax revenue to decrease by 5.8 trillion won to 68.5 trillion won this year, but the Korea Economic Research Institute forecasts that if the COVID-19 crisis prolongs for more than six months, the sales of domestic large corporations will decrease by an average of over 8%. Professor Kang Sung-jin of Korea University’s Department of Economics pointed out, "Even though there is political burden, the government should discuss tax increases through two major measures: raising tax rates and expanding the tax base."

Prime Minister Chung Sye-kyun (left) and Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki, among others, are attending an extraordinary Cabinet meeting held at the Government Seoul Office in Jongno-gu, Seoul, on the 3rd. At this Cabinet meeting, the third supplementary budget bill (supplementary budget) was approved to overcome the economic crisis caused by the novel coronavirus disease (COVID-19) and to prepare for the post-COVID era. Photo by Kim Hyun-min kimhyun81@

◆ "Urgent Need to Discuss Fiscal Rules" in Unison = Experts advise that laws and regulations surrounding the national debt ratio should be clarified to manage fiscal soundness. While it is inevitable that debt increases due to many urgent spending needs, the absence of 'rules' to apply when managing this is a separate issue. Professor Kim Soyoung of Seoul National University’s Department of Economics diagnosed, "As economic growth slows and debt increases, even low costs can become a burden just from interest on government bonds," adding, "The government's expansionary fiscal policy before the COVID-19 outbreak has worsened fiscal capacity." She emphasized, "Expansionary fiscal policy is inevitable, but a mid- to long-term plan on how to handle fiscal soundness issues during the process should also be presented."

The 21st National Assembly is already taking action. Rep. Chu Kyung-ho, a former 1st Vice Minister of Economy and Finance, is preparing to propose an amendment to the National Finance Act to maintain the national debt ratio below 45% of GDP. The core of the bill is to include a debt reduction plan in the national fiscal management plan within five fiscal years if the ratio exceeds this limit. Rep. Song Eon-seok of the same party, who proposed a related bill (to keep the ratio within 40% of GDP) in the 20th National Assembly, also plans to reintroduce the bill. In the ruling party, Rep. Song Young-gil of the Democratic Party proposed adopting the German model, which limits new national debt to within 0.35% of GDP, during the 20th National Assembly.

The government also recognizes the need to establish such fiscal rules. However, there is a stance that discussions are needed on whether to specify this in law or handle it at the level of management by the relevant ministry. A Ministry of Economy and Finance official explained, "We need to discuss whether to set various limits in a form similar to the Fiscal Soundness Act," adding, "There have been calls for the introduction of fiscal rules, and there is internal consensus."

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