[2021 Budget] "Even at a Deficit for Rapid Economic Recovery"... Future Generations Bear the Fiscal Burden

2024 National Debt 1,327 Trillion Won... Deficit Bonds 90 Trillion Won Record High
Government Faces Inevitable Large-Scale Fiscal Injection... Sets 4 Major Investment Priorities
Experts Warn National Debt Ratio Rose to High 50% Range in 5 Years Too Rapidly

[Asia Economy Reporter Kwangho Lee] The government maintains that an expansionary fiscal policy is inevitable to achieve early recovery and sustain economic rebound momentum from the economic shock caused by the novel coronavirus disease (COVID-19). However, there are growing 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 main 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% to 50.9% in 2022 and 58.3% in 2024. This means 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 includes debts of both 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 with heavy repayment burdens will rise 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 represents an increase of 521.8 trillion won over four years.

There have 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 it has increased by 135 trillion won. The national debt ratio for 2023 was also 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 insists that large-scale fiscal spending is unavoidable. The government has set four key investment priorities: ▲ rapid and strong economic recovery ▲ securing future growth engines ▲ strengthening inclusive employment and social safety nets ▲ enhancing public safety and quality of life. To this end, the government also announced ten major investment projects worth 160 trillion won.

Specifically, plans include investing 21.3 trillion won in the Korean New Deal, 8.6 trillion won for job creation, and 1.8 trillion won for local 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 enterprises and ventures, and 20.7 trillion won for the Youth Hope Package.

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

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 issuance of deficit bonds next year is projected at 89.7 trillion won, approaching 90 trillion won. This is the largest scale ever based on the general account. Deficit bonds have increased sharply 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 main budget).

Accordingly, the government's fiscal soundness indicator, 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 could be fatal to the country's external creditworthiness.

The gap between the total revenue growth rate (0.3%) and total expenditure growth rate (8.5%) will reach -8.2 percentage points, the largest ever recorded. The expenditure scale (555.8 trillion won next year) exceeding total revenue (483 trillion won) will continue for the second consecutive year. Both the total expenditure exceeding total revenue and the expenditure growth rate surpassing the revenue growth rate are extremely rare cases.

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 as well, the speed at which the national debt ratio has increased from the high 30% range to the high 50% range in just five years is really fast."

An Chang-nam, a professor of taxation at Gangnam University, pointed out, "Due to COVID-19, tax revenues have decreased while 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.