National Debt Surges Instantly... Fiscal Deficit Ratio Hits 6% Mark for the First Time

Most of the 4th Supplementary Budget Funds Are Deficit Bonds
Deficit Ratio of Managed Fiscal Balance
Approaching Twice the 2020 Budget Estimate

[Asia Economy Reporter Jang Sehee] As the government prepared the 4th supplementary budget (supplementary budget) worth 7.8 trillion won, the largest in 59 years, due to the resurgence of the novel coronavirus infection (COVID-19), the national debt has ballooned again. Most of the 4th supplementary budget funds, 7.5 trillion won, are planned to be raised through deficit bonds, raising concerns about the deterioration of fiscal soundness.

According to the Ministry of Strategy and Finance's 4th supplementary budget plan on the 11th, the national debt will soar to 846.9 trillion won with this 4th supplementary budget. It increased by 106.1 trillion won in one year. Next year's national debt is also expected to rise from the initially projected 945 trillion won to 952.5 trillion won. Due to the increase in national debt, the national debt-to-GDP ratio will rise to an all-time high of 43.9%. The national debt ratio, which was 37.1% based on last year's main budget, surpassed 40% through four supplementary budgets this year.

While revenues remain the same, total expenditures have increased, further expanding the fiscal deficit. Both the 3rd and 4th supplementary budgets have total revenues of 470.7 trillion won, but total expenditures increased from 546.9 trillion won to 554.7 trillion won. As a result, the integrated fiscal balance, which is total revenue minus total expenditure, recorded a deficit of 84 trillion won, with a deficit ratio of 4.4% relative to GDP. The managed fiscal balance deficit ratio also reached 6.1%, expected to rise to the 6% range for the first time ever. This deficit ratio is nearly double the 3.5% anticipated in the 2020 budget plan.

The government plans to establish fiscal rules within this month to manage fiscal balance and national debt. Hong Nam-ki, Deputy Prime Minister and Minister of Strategy and Finance, said, "We will fiercely carry out structural adjustments on government budget projects and work on revising tax exemption and reduction systems or securing tax revenue from undeclared income," adding, "We will announce the fiscal rules plan in September to ensure that fiscal balance and national debt are properly monitored."

However, experts agree that since fiscal rules without enforceability have no effect on reducing expenditures, a comprehensive restructuring of the entire fiscal expenditure structure must proceed.

Professor Hong Woo-hyung of Hansung University’s Department of Economics pointed out, "Our country has many one-time expenditures and many transfer payments, so expenditure restructuring is necessary," adding, "Especially transfer payments have low fiscal multipliers even if increased significantly, so their economic ripple effects are low." Transfer payments refer to income transfers paid without any compensation related to production activities, such as unemployment benefits or disaster compensation. Professor Yang Jun-mo of Yonsei University’s Department of Economics said, "Welfare expenditures have ballooned like a snowball," and emphasized, "We need to carefully review whether there is any waste and whether the money is reaching those who need it."

In fact, according to the '2020?2024 National Debt Management Plan' submitted by the government to the National Assembly, mandatory expenditures in the welfare sector steadily increase. From 123.2 trillion won this year (based on the 3rd supplementary budget), it is projected to rise to 131.5 trillion won next year, 139.9 trillion won in 2022, 148.8 trillion won in 2023, and 160.6 trillion won in 2024, increasing at an average annual rate of 7.6%.

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