"Government Economic Outlook Should Be Presented Based on Evidence, Not Will" - A Stark Warning from a National Research Institute

Estimated Revenue with 0.6% Growth Forecast This Year... Significant Gap from Growth Rates Presented by Domestic and International Institutions
Deficit National Debt Surges 78% in 4 Years... Concerns Over Negative Impact on Credit Ratings

Kim Tae-nyeon, floor leader of the Democratic Party of Korea, is delivering opening remarks at the party-government consultation on the 2021 budget held at the National Assembly on the 26th. Photo by Yoon Dong-joo doso7@

[Sejong=Asia Economy Reporter Kim Hyunjung] A national policy research institute has expressed the opinion that the government should present economic forecasts based not only on its policy will for economic recovery but also on "objective evidence." It pointed out that the government's optimistic outlook leads to a worsening of the national finances beyond the planned level and that there have been cases in the past where tax revenue shortages were experienced for the same reason.

According to the Korea Institute of Public Finance on the 19th, Deputy Research Fellow Kim Woo-hyun published an evaluation report on the "2021 Budget and the 2020?2024 National Fiscal Management Plan" in the recently released "Monthly Fiscal Forum (September issue)." Kim mentioned the main contents of the fiscal management plan and pointed out that the government's assumed nominal GDP growth rates of 0.6% in 2020 and 4.8% in 2021 show discrepancies compared to forecasts from domestic and international institutions.

He said, "Domestic and international institutions forecast real GDP growth rates of -2.1% to -1.1% in 2020 and 2.8% to 3.5% in 2021, indicating a difference from the government's projections." He added, "Although it is difficult to estimate accurate economic forecasts amid the considerable uncertainty caused by the COVID-19 pandemic, if the government's optimistic economic outlook does not materialize, tax revenues may fall short of expectations, and the managed fiscal balance and national debt ratio could worsen beyond the plan." He also emphasized, "In the past, the government has experienced tax revenue shortages due to somewhat optimistic economic forecasts. Therefore, it is necessary to consider presenting, verifying, and utilizing evidence-based objective forecasts rather than economic forecasts that merely reflect the policy will for economic recovery."

Furthermore, even reflecting the COVID-19 situation, he diagnosed that the recent continuous increase in national debt relative to GDP is steep. He expressed concern, saying, "Even at the medium-term point when the COVID-19 pandemic is expected to subside, the pace of national debt increase will not ease, and the quality of the debt is also poor."

Deputy Research Fellow Kim particularly focused on the rapid increase in deficit debt that must be repaid through taxes and other means due to the lack of offsetting assets. According to the 2020?2024 National Fiscal Management Plan, the forecast for deficit debt in 2024 is 899.5 trillion won, a 77.5% surge compared to the 2020 forecast of 506.9 trillion won. This is due to deteriorating revenue conditions despite fiscal spending in areas such as employment and welfare to respond to COVID-19.

Regarding this, Kim warned, "If strong discretionary spending restructuring does not accompany the increasing trend of mandatory expenditures, the fiscal management scope for the next generation will be correspondingly reduced," and added, "The level of national debt can be a reference factor in the decision-making of entities that evaluate credit ratings."

He also cited another researcher's paper, stating, "If national debt increases by about 30%, (credit rating agencies) lower the national credit rating by one notch. Especially when the pace of national debt increase is rapid, the negative impact on credit ratings can be greater." In February, the international credit rating agency Fitch diagnosed that the expected level of Korea's national debt presented in the 2019?2023 National Fiscal Management Plan could pose a significant pressure factor on credit ratings in the medium term.

He also clearly noted that experts are calling for fiscal innovation to improve the efficiency of fiscal spending as a countermeasure related to this. He emphasized, "Fiscal soundness is not simply a product of dogma but can mean preparation to effectively respond to fiscal spending demands and securing fiscal capacity for the next generation," and added, "Active improvement of the continuous increase in national debt and the main forecasts of long-term fiscal outlook is necessary." He further added, "This perspective should be discussed separately from emphasizing the short-term active fiscal role for the people currently suffering from the COVID-19 pandemic."

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