'4th Disaster Relief Fund' Surpassing 1st to 3rd Rounds... Increasing Fiscal Burden

Although the scale and support targets are still under discussion,
deficit bond issuance cannot be avoided
ahead of the April 7 by-elections,
with the possibility of expanding the number of beneficiaries.

[Asia Economy reporters Jang Sehee and Moon Chaeseok] As discussions on the 4th disaster relief fund have been formalized, controversy over national fiscal soundness is also inevitable. While the scale and support targets remain subjects for negotiation, the issuance of deficit bonds itself cannot be avoided. Since the damage from COVID-19 has accumulated, this disaster relief fund is expected to far exceed the scale of the initially provided 1st to 3rd disaster relief funds. In addition, the Democratic Party of Korea and the government are currently working on institutionalizing a loss compensation system for self-employed individuals. The logical battle between the ruling party, which argues that "the treasury should be opened to support vulnerable groups," and the government, which insists that "fiscal policy must serve as the last bastion," is likely to intensify.

◆ Will the damage targets expand due to accumulated COVID-19 impact? = Inside and outside the government, there is growing weight on the possibility that the scale of the 4th disaster relief fund will greatly exceed current expectations. The ruling party and government see the necessity of supplementary budgeting to fill the gap before the self-employed loss compensation and to stimulate the stagnant economy partially through consumption, as most previous disaster relief fund cases involved expanding the target groups. The government previously added corporate taxi drivers (80,000 people), who were not included in earlier discussions, to the support targets. The ruling party has expressed views that vulnerable groups such as special employment types and freelancers, who are vulnerable to COVID-19, should also be included. There are forecasts that the supplementary budget could surpass last year's record-high 3rd supplementary budget (35.1 trillion won). A government official said, "We are reviewing whether there are additional groups to consider beyond those initially included," adding, "Since financial resources are limited, the plan must be carefully crafted at once." Moreover, with the April 7 by-elections approaching, the disaster relief fund targets are likely to expand further as it could strongly influence voter sentiment. Some speculate that disaster relief funds categorized for youth may also be devised.

◆ Continued concerns over worsening fiscal soundness = The political sphere is pushing for both selective support for the self-employed and vulnerable groups and universal support, yet has not presented concrete measures to secure funding. As discussions progress and the disaster relief fund scale grows, there are projections that national debt will surpass 1,000 trillion won within this year. Excessive increases in national debt could deteriorate fiscal soundness and negatively impact future credit ratings. Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, has expressed concerns about worsening fiscal soundness, even using the blunt phrase, "Fiscal policy is not a bottomless well." On his Facebook the day before, Hong emphasized, "National finances are not just numbers compared to GDP and ending there; of course, it is not a bottomless well," adding, "It is a complex issue connected to fiscal scale, debt speed, fiscal balance, national credit, and tax burden."

According to the Ministry of Economy and Finance’s ‘2020?2024 National Fiscal Management Plan,’ last year’s national debt-to-GDP ratio rose to 43.5%. This year it is projected to be 46.7%, 50.9% in 2022, 54.6% in 2023, and 58.3% in 2024. By the end of this year, national debt is expected to reach 956 trillion won based on the main budget. Considering only the main budget, national debt would have surged by over 100 trillion won in just one year (805 trillion won based on the 2020 main budget).

As the national debt ratio approaches 60%, controversy over the national debt ratio during disaster relief fund discussions may also arise. The International Monetary Fund (IMF) recently stated in a briefing after its annual consultation that the appropriate level of national debt Korea can sustain in the medium to long term is 60% of GDP, as proposed in the ‘Korean-style fiscal rule’ introduction plan. The ruling party can argue that since the current national debt ratio does not exceed 60%, there is room for maneuver. Regarding this, Professor Kim Soyoung of Seoul National University’s Department of Economics noted in a paper titled ‘Economic Environment Changes and Fiscal Policy Effects Due to COVID-19,’ published last month in the Korea Economic Forum, that "When the government continuously pursues expansionary fiscal policy by issuing government debt, it should be noted that government debt will continuously increase, and the rise in risk premiums could have long-term adverse effects."

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