Fiscal warning lights are on... but a 'Korean-style fiscal rule' without an upper limit is likely to emerge

The 4th Supplementary Budget Records National Debt at 846.9 Trillion Won

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] As the government has prepared a 4th supplementary budget (추경) worth 7.8 trillion won due to the resurgence of the novel coronavirus infection (COVID-19), the national debt has increased further. Although the government announced plans to establish fiscal rules to secure fiscal soundness, it continues to emphasize flexibility, leading to expectations that no upper limit will be set.

According to the Ministry of Economy and Finance's 4th supplementary budget on the 12th, the national debt will soar to 846.9 trillion won with this 4th supplementary budget. It increased by 106.1 trillion won in just 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 debt-to-GDP ratio will rise to a record high of 43.9%. The national debt ratio, which was 37.1% based on last year's main budget, surpassed 40% this year after four rounds of supplementary budgets.

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 is also expected to rise to 6.1%, marking the first time it has exceeded 6%. This deficit ratio is nearly double the 3.5% anticipated in the 2020 budget proposal.

Although the government stated it would manage fiscal balance and national debt through fiscal rules, concerns are emerging that the upper limit criteria will ultimately be excluded due to excessive emphasis on flexibility within the fiscal rules.

Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki previously stated, "We will review flexible fiscal rules suitable for Korea's situation from a medium-term perspective." A government official also added, "Setting fixed numbers is a very burdensome situation," and "If an upper limit is set, the flexibility of fiscal management may decrease."

Meanwhile, the government has decided to push for drastic expenditure restructuring to maintain fiscal sustainability. It will conduct bold restructuring of discretionary spending, focusing on similar, overlapping, low-performance, and delayed execution projects, and improve spending efficiency through institutional improvements such as enhancing the welfare delivery system for mandatory expenditures. Additionally, the government plans to actively utilize the fiscal project evaluation system to continue efforts to improve expenditure structure and strategically allocate resources based on investment priorities.

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