Han "Better to spend more money than wash face"... Following debt-ridden Japan?

President Moon at National Fiscal Strategy Meeting
Additional Fiscal Spending Using Tax Revenue
Japan's National Debt Ratio Exceeds 250%
Neglect of Expenditure Reform and Expansionary Fiscal Policy
Concerns Over Following Japan's Path

[Asia Economy Reporters Jang Sehee and Moon Chaeseok] President Moon Jae-in is emphasizing an expansionary fiscal policy, making the formation of a second supplementary budget (추경) this year appear to be a foregone conclusion. As tax revenues are expected to increase with economic recovery, the role of fiscal policy is being highlighted. However, concerns are also emerging that this could be a missed opportunity to improve fiscal soundness.

◆ Moon: "Additional fiscal input using increased tax revenues"... Government also adopts ‘expansionary fiscal policy’= The government plans to roll out various support measures to overcome the COVID-19 crisis and resolve difficulties. On the 28th, Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, attended the Emergency Economic Central Countermeasures Headquarters meeting and stated, "We will identify as many tasks as possible to be intensively promoted in the second half of the year to actively support domestic demand, investment, and exports, and include them in the economic policy direction for the second half." This is a follow-up measure after President Moon decided at the National Fiscal Strategy Meeting the previous day to maintain expansionary fiscal policy through next year. Earlier, President Moon had said, "We must keep open the possibility of additional fiscal input using the significantly increased supplementary tax revenues."

Accordingly, the government decided to extend the benefit of the reduced automobile individual consumption tax (from 5% to 3.5%), which was scheduled to end at the end of June, until the end of the year. To create youth jobs, starting in July, a special youth employment incentive of up to 750,000 KRW per month for up to one year will be provided when hiring young people as regular employees.

This policy is based on the judgment that there is room for additional fiscal spending. According to the International Monetary Fund (IMF) fiscal monitor report, Korea’s additional fiscal spending to respond to COVID-19 amounts to 4.5% of its Gross Domestic Product (GDP), which is less than half the average of the Group of 20 (G20) countries.

◆ Concerns over following Japan’s path= The biggest concern if the government continues with an expansionary fiscal stance is the deterioration of fiscal soundness. Although the international credit rating agency Moody’s maintained Korea’s sovereign credit rating at Aa2 with a stable outlook, it pointed out that "the long-standing record of fiscal discipline could be put to the test."

South Korea formed four supplementary budgets last year alone and conducted an additional supplementary budget in March this year. As a result, the national debt forecast by the end of the year is expected to balloon to 965.9 trillion KRW.

Therefore, concerns are expected to grow again that national debt could surge unknowingly, similar to Japan. According to the IMF, Japan’s national debt-to-GDP ratio, which was 226.1% in 2012, rose by 27.5 percentage points to 253.6% over ten years. This year, due to fiscal expansion in response to COVID-19, it is expected to remain at 253.6%, and by 2026, it is projected to soar to 254.7%. According to IMF standards, Japan’s general government fiscal balance (D2 basis) is expected to record -12.6% this year.

◆ Revenues actually decreasing, need to enact laws for revenue expansion= Conversely, the phenomenon of reducing the money that should be collected is similar. South Korea initially planned to fully implement comprehensive taxation on financial income from 2023 with a 20 million KRW deduction, but under public pressure to revitalize the capital market, this was raised to 50 million KRW. The political sphere is also advocating for postponing the planned Bitcoin taxation scheduled for January next year. The Korea Institute of Public Finance analyzed that in Japan, fundamental reforms of expenditures were delayed, and scheduled fiscal deficits led to continued issuance of deficit bonds.

Professor Kim Woo-cheol of the University of Seoul said, "About 15 years ago, Japan neglected expenditure reform and continued an expansionary fiscal policy, which is described as the ‘crocodile’s mouth beginning to open.’ South Korea now resembles Japan at that time in many ways," and added, "At the very least, after the new government takes office, laws related to revenue expansion should be enacted so that revenue growth can proceed smoothly from 2023."

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