Senior Expert of the Budget Committee Warns Government Spending... "Concerns Over Rising Prices and Fiscal Soundness Deterioration"

Voices Grow Louder for Additional 2nd Supplementary Budget Increase...
Warnings of Side Effects Such as Inflation Rise and Fiscal Soundness Deterioration

Deputy Prime Minister for Economy Hong Nam-ki attended the plenary session of the Special Committee on Budget and Accounts held at the National Assembly on the 14th, gave a proposal explanation on the 2nd supplementary budget, then passed Prime Minister Kim Boo-kyum and returned to his seat. Photo by Yoon Dong-joo doso7@

[Sejong=Asia Economy Reporter Kim Hyunjung] As the ruling party demands an increase in the government’s 33 trillion won second supplementary budget (supplementary budget) plan, voices expressing concerns about inflation caused by large-scale fiscal projects and deterioration of fiscal soundness have emerged from the senior expert committee of the related standing committee. In particular, it is pointed out that since the actual growth rate exceeds the potential growth rate, there is a high possibility of rising prices, and the economic stimulus effect through expansionary fiscal policy may eventually be offset.

On the 15th, Jo Euisub, senior expert of the Special Committee on Budget and Accounts, stated in the recently prepared review report on the “2021 Second Supplementary Budget and Fund Operation Plan Amendment” that “the government forecasts a somewhat higher growth of 4.2% this year compared to major institutions’ projections, and the effect of the supplementary budget will help achieve the target.” However, he added, “Since the economic growth rate exceeding the potential growth rate can cause inflation and the timing of interest rate hikes is expected to be brought forward, it is necessary to seek ways to maximize the effect of fiscal input.”

According to the Bank of Korea, South Korea’s potential growth rate is estimated to be around 2.5?2.6%, and the recent consumer price inflation rates recorded 2.3% in April, 2.6% in May, and 2.4% in June, consecutively exceeding the stable target rate of 2%.

He advised, “Inflation is expected not only in South Korea but globally, and central banks of major countries such as the United States have indicated that the timing of interest rate hikes may be accelerated. The government should strengthen monitoring and management of detailed economic indicators to suppress side effects from additional fiscal input and to enhance economic growth.”

He also expressed concerns about the fiscal burden from the large-scale supplementary budget. Including this second supplementary budget (33 trillion won), South Korea’s fiscal response scale relative to GDP is about 16.5%, which is higher than the global average (15.3%) but lower than the advanced countries’ average (27.7%). However, he pointed out that the increase rate of the national debt (D2) to GDP ratio before and after COVID-19 exceeds that of G7 countries and the advanced countries’ average.

According to Jo’s analysis of IMF data, South Korea’s national debt to GDP ratio increased from 42.2% in 2019 to 53.2% in 2021, a rise of 11.0 percentage points, with an increase rate of 26.1%. During the same period, the G7 countries’ national debt to GDP ratio rose by 21.5 percentage points with an increase rate of 18.2%. The advanced countries’ average increased by 18.7 percentage points with an increase rate of 18.0%.

He advised, “According to the IMF’s medium-term national debt ratio forecast, South Korea’s national debt ratio will continue to rise, reaching 69.7% in 2026, while the G7 countries and advanced countries’ averages are expected to remain at similar levels or slightly decline. To manage fiscal soundness such as the speed of national debt increase after the crisis, a reliable fiscal management plan must be prepared.” He added, “Since excess tax revenues and other resources are used in the supplementary budget instead of reducing national debt, priorities by project should be reviewed for efficiency.”

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