[2021 Budget] 2024 National Debt 1,300 Trillion Won... Fiscal Soundness 'Wobbles'

Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, is reading the announcement at the detailed pre-briefing of the '2021 Budget Proposal' held at the Government Sejong Complex on the 27th of last month.

[Asia Economy Reporter Kwangho Lee] The government maintains that an expansionary fiscal policy is inevitable to achieve early recovery and economic rebound momentum from the economic shock caused by the novel coronavirus infection (COVID-19). However, there are increasing concerns that this burden will be passed on not only to the current generation but also to future generations. The national debt, which stands at 805.2 trillion won this year (based on the original budget), is expected to surpass 1,000 trillion won in 2022 and soar to 1,327 trillion won by 2024. The ratio of national debt to Gross Domestic Product (GDP) will also jump from 39.8% during the same period to 50.9% in 2022 and 58.3% in 2024. This means that the national debt will far exceed half of the GDP.

According to the '2020?2024 National Fiscal Management Plan' announced by the government on the 1st, the national debt, which refers to the debt of the central and local governments, will increase by 139.8 trillion won from 805.2 trillion won this year to 945 trillion won next year. Based on the third supplementary budget (834.4 trillion won), the increase is 110.6 trillion won. Among this, deficit bonds, which carry a heavy repayment burden, will increase by 29.3 trillion won from 60.3 trillion won this year to 89.7 trillion won. The national debt will snowball to 1,070.3 trillion won in 2022, 1,196.3 trillion won in 2023, and 1,327 trillion won in 2024. This means an increase of 521.8 trillion won over four years.

There have also been significant changes compared to the 2019?2023 National Fiscal Management Plan released around this time last year. At that time, the national debt for 2023 was projected at 1,061.3 trillion won. However, this time, an additional 135 trillion won has been added. The national debt ratio for 2023 has also been revised upward by 8.3 percentage points from 46.3% to 54.6%.

The government views next year as a golden time to overcome the COVID-19 crisis and believes large-scale fiscal investment is unavoidable. The government has set four major investment focus areas: ▲rapid and strong economic recovery ▲securing future growth engines ▲strengthening inclusive employment and social safety nets ▲enhancing national safety and quality of life. To this end, the government also announced ten major investment projects worth 160 trillion won. Specifically, 21.3 trillion won will be invested in the Korean New Deal, including 8.6 trillion won for job creation, and 1.8 trillion won for local love gift certificates and consumption coupons. Additionally, 16.6 trillion won will be allocated for balanced national development, 1 trillion won for the New Deal investment fund, 33.9 trillion won for policy finance for small and medium-sized venture companies, and 20.7 trillion won for the Youth Hope Package.

However, as spending expands amid worsening economic conditions, the issuance of deficit bonds is increasing, and the fiscal balance is expected to deteriorate significantly. The scale of deficit bond issuance next year is 89.7 trillion won, approaching 90 trillion won. This is the largest ever under general accounting standards. Deficit bonds have increased significantly from 34.3 trillion won in 2019 to 97.1 trillion won based on the third supplementary budget this year (60.3 trillion won based on the original budget).

Accordingly, the government's fiscal soundness, represented by the managed fiscal balance deficit, is expected to worsen from 71.5 trillion won this year to 109.7 trillion won next year and 127.5 trillion won in 2024. The ratio to GDP is also expected to fall from -3.5% this year to -5.4% next year and -5.6% in 2024. A national debt ratio of 60% is the standard for fiscal soundness used by the European Union (EU). A rapid deterioration in the national debt ratio can be fatal to external credibility.

The gap between total revenue and total expenditure will also reach a record high of 8.2 percentage points (p). The situation where total expenditure (555.8 trillion won next year) exceeds total revenue (483 trillion won) will continue for the second consecutive year. It is extremely rare for total expenditure to exceed total revenue and for the growth rate of total expenditure to surpass that of total revenue.

Experts evaluate that the government has been overly optimistic in its economic outlook and fiscal management plan. Hong Jun-pyo, a research fellow at Hyundai Research Institute, criticized, "Although expansionary fiscal policy is inevitable next year, the speed at which the national debt ratio increases from the high 30% range to the high 50% range in just five years is really fast."

Professor Ahn Chang-nam of the Taxation Department at Gangnam University pointed out, "Due to COVID-19, tax revenues have decreased, and welfare costs have increased significantly. Ultimately, to avoid deficits, the government has no choice but to issue bonds or raise taxes. This could impose a tremendous burden on future generations."

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