[2020 National Settlement] Integrated Fiscal Deficit Swells Sixfold Last Year... 'A Crocodile Mouth' Opens Wider

2020 Fiscal Year National Settlement Deliberated and Resolved at Cabinet Meeting
Integrated Fiscal Balance Deficit Soars from 12 Trillion to 71.2 Trillion Won
Government Assesses 'Increase Rate and Speed Favorable Compared to Major Countries'
"Next Government Facing Tax Hike Will Be the Most Unfortunate in History"

[Sejong=Asia Economy Reporter Kim Hyunjung] As the national debt surged by more than 240 trillion won in a year, the fiscal balance has also deteriorated sharply. This is because expenditures increased due to the spread of COVID-19, while the growth rate of tax revenues slowed down. The deficit in the consolidated fiscal balance, which turned negative in 2019, jumped nearly sixfold in just one year, marking a record high. The government assessed that Korea's fiscal soundness is still at a relatively good level compared to major countries. However, considering the unstable revenue base and the political turmoil forecasted for this year, concerns are growing that the 'crocodile mouth' phenomenon?where the gap between expenditures and revenues widens?will intensify.

According to the '2020 Fiscal Year National Settlement' announced by the government on the 6th, last year's domestic consolidated fiscal balance deficit reached 71.2 trillion won, an increase of 59.2 trillion won compared to the previous year (-12 trillion won). The ratio of the consolidated fiscal balance to gross domestic product (GDP), which indicates the level of debt relative to the size of the economy, expanded by 3.1 percentage points from -0.6% to -3.7% during the same period.

◆Record Deficit Due to COVID-19 Fiscal Projects= The record-high fiscal deficit last year was due to the government's significant expansion of fiscal projects in response to COVID-19. Last year's total expenditures increased by 56.6 trillion won from the previous year to 453.8 trillion won, following the supplementary budget for overcoming the COVID-19 crisis and the implementation of inclusive growth national tasks. Total revenues rose by 63.5 trillion won (15.7%) to 465.5 trillion won compared to the previous year; however, national tax revenues decreased by 7.9 trillion won due to factors such as a 16.7 trillion won drop in corporate tax.

The deficit in the managed fiscal balance also reached 112 trillion won, an increase of 57.5 trillion won from the previous year, marking the highest since 2011 when data collection began. The managed fiscal balance excludes the four major social security funds from the consolidated fiscal balance and reflects the government's actual fiscal condition. The ratio of the managed fiscal balance to GDP also showed the worst figure at -5.8%.

As liabilities increased faster than assets, net assets on the financial statements fell by 50.8 trillion won from the previous year to 504.9 trillion won. The global surplus, including unused funds, amounted to 9.4 trillion won. This is used for expanding local finances or repaying national debt, with some processed as next year's own revenues.

◆Government Diagnoses as ‘Good’... No Discussion on Tax Increase= Although the fiscal situation is worsening, the government's assessment remains optimistic. It diagnoses Korea's fiscal condition as relatively 'good' compared to major advanced countries. In particular, citing the International Monetary Fund (IMF) forecast from January, it emphasized that while the global fiscal deficit ratio is -11.8% and advanced countries are at -13.3%, Korea is estimated at around 3.1%. The government also explained that the rate of debt increase is expected to rise by 6.2 percentage points in Korea from 2019 to 2020 based on general government debt, which is lower than the global increase rate of 14.2 percentage points. Kang Seungjun, Director General of Fiscal Management at the Ministry of Economy and Finance (Deputy Minister), stated, "Even if we endure a temporary increase in debt now, we must secure early crisis recovery and economic dynamism through expansionary fiscal policy. However, considering the rapid increase in national debt and medium- to long-term fiscal conditions, we plan to strengthen efforts to manage fiscal soundness."

Experts warn that if fiscal expenditures are significantly expanded without discussions on tax increases amid a weakened revenue base, Korea's fiscal trajectory could follow Japan's 'crocodile mouth' pattern. Kang Sungjin, Professor of Economics at Korea University, said, "The problem is that Korea was already in a deficit state through expansionary fiscal policy even before the COVID-19 crisis," adding, "Since it is impossible to reduce the budget by more than 70 trillion won next year in terms of balanced budgeting, continuous deficit formation is inevitable." He further added, "The next government will be the most unfortunate government in history that requires intense fiscal management."

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