Discretionary Spending Share Hits Six-Year High... Budget Rigidity Actually Increases

Flexible Budget Management Positive but
Debt Increased by 10 Trillion Won in Supplementary Budget Process

"Spending Increase Difficult and Stagnation Approaching"
Spending Restructuring Needed When COVID-19 Recovery Phase Comes

[Asia Economy Reporter Jang Sehee] As the government continues its expansionary fiscal policy to respond to COVID-19, the proportion of discretionary spending in the budget has reached its highest level in six years. An increase in discretionary spending is generally seen as positive because it allows the government to manage the budget flexibly. However, after issuing four supplementary budgets last year and increasing debt, and with plans to issue an additional 10 trillion won in government bonds during this year's supplementary budget process, voices are emerging that even discretionary spending should be cut.

According to the Ministry of Economy and Finance on the 29th, the proportion of discretionary spending in this year's main budget was 52.3%, the highest since 2015 (54.0%). In terms of proportion, this can be interpreted as an increased scope for utilizing the budget according to circumstances.

The expansion of the discretionary spending ratio appeared during the successive supplementary budget processes. At the time of the first supplementary budget last year, the discretionary spending ratio was 51.0%, which increased to 54.0% after three more supplementary budgets. This marked a sharp increase in discretionary spending, which had been on a declining trend from 52.7% in 2016 to 49.0% in 2019.

◆ Mandatory Spending Maintains 50% Range, Growth Spending Shrinks = The increasing proportion of mandatory spending (distribution) each year has been pointed out as a problem in South Korea’s budget. Mandatory spending, which includes fixed costs such as welfare and defense, is stipulated by law and cannot be easily reduced. It also naturally increases as the gross domestic product (GDP) grows.

This year, the proportion of mandatory spending relatively decreased due to the increase in discretionary spending. However, with the introduction of a new national employment program this year, an additional 800 billion won in budget will be required annually going forward. Furthermore, the basic pension, which was 13.2 trillion won in 2020, will increase to 15 trillion won this year, and medical benefits will also rise by 700 billion won compared to the previous year. Since the total fiscal volume is fixed, it has become inevitable to reduce fiscal spending related to growth and focus the budget on distribution, which is mandatory spending.

◆ "Debt Brake Needed... Long-term Funding Supply Plan Must Be Formulated" = While an increase in discretionary spending is positive in terms of enhancing budget flexibility, this year’s situation is different. When the fiscal growth rate reaches an unsustainable level, discretionary spending related to investment must be cut first.

A government official said, "Until now, the ratio of national debt to GDP was not high, so we increased the fiscal growth rate through government bond issuance and steadily increased discretionary investment spending. However, if we continue at the current pace, it will become difficult to increase spending further, and a stagnation point will come."

Academics also agree that a long-term funding supply plan must be formulated in response to the rapid increase in national debt. Professor Hong Woo-hyung of Hansung University’s Department of Economics said, "In the process of increasing the total discretionary amount, there are cases where budgets that do not need to be increased are classified as discretionary spending. The problem is that there is no plan for how to supply funds in the long term." He added, "We have not applied a national debt brake, and if acceleration continues, the shock of a breakdown will inevitably be greater." In fact, national debt increased from 846.9 trillion won after the fourth supplementary budget last year to 965.9 trillion won after the first supplementary budget this year.

Professor Kim Soyoung of Seoul National University’s Department of Economics also pointed out, "When the COVID-19 recovery phase begins in the future, restructuring of disaster relief funds is absolutely necessary. Discretionary spending is allocated annually with clear purposes, so it should be reduced over time, but the problem is that the total amount itself does not decrease."

The rapid increase in national debt can also negatively affect external creditworthiness. Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, stated on social media, "Fortunately, we avoided it last year, but about 100 countries experienced downgrades in their national credit ratings. Excessive national debt becomes a burden for our children’s generation."

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