Next Year's Budget to Consider 8% Growth Rate... Continued Expansionary Fiscal Policy

Total Expenditure Surpasses 600 Trillion Won
Reviewing Increased Budget for Self-Employed Compensation and Carbon Neutrality

[Image source=Yonhap News]

[Sejong=Asia Economy Reporter Moon Chaeseok] A plan to increase next year's budget by over 8% compared to this year's main budget is under consideration. This is the result of increasing future response funds such as compensation for small business losses due to the fourth wave of COVID-19 and carbon neutrality. With this year's national tax revenue exceeding expectations, the deficit scale of the national finances relative to the size of the Korean economy is expected to improve.

On the 22nd, according to the Ministry of Economy and Finance and the Democratic Party of Korea, the ruling party and government are in the final stages of coordinating next year's budget proposal, which includes these details. The government plans to finalize the budget proposal around the latter half of next week after going through procedures such as consultations with the ruling party this week, and submit it to the National Assembly early next month.

The government is reportedly reviewing a total expenditure growth rate of over 8% for next year's budget. This means that next year's total budget expenditure will exceed 600 trillion won. If next year's total expenditure increases by 8.0% compared to this year's main budget (558 trillion won), it will be 602 trillion won; if it increases by 8.5%, it will be 605 trillion won; and if it rises to 9%, it will be 608 trillion won. This year's main budget growth rate was 8.9%. The 'over 8% growth rate' is higher than the baseline of 7% discussed at this year's National Fiscal Strategy Meeting and the 7.5% reported to President Moon Jae-in last week. This means continuing the expansionary fiscal policy until the last year of the Moon Jae-in administration.

Considering that the ongoing fourth wave of COVID-19 shows no signs of subsiding, the government is reportedly increasing next year's budget expenditure further. For example, the budget for small business loss compensation for next year, which was previously estimated at around 600 billion won before the fourth wave, has been significantly increased. The loss compensation budget allocated in this year's second supplementary budget was 1 trillion won, but there are voices calling for at least double that amount to be allocated next year. This 1 trillion won is the amount to compensate for damages after the Small Business Loss Compensation Act was implemented in July.

The loss compensation will be actively paid around October to November after the Loss Compensation Committee convenes in October to assess the scale of losses and conduct reviews. Considering the fourth wave of COVID-19 and related procedures, some compensation for this year's damages may need to be paid from next year's budget. Taking into account some of this year's damages and next year's expected losses, the government is expected to include a loss compensation budget in next year's budget that exceeds the 1 trillion won allocated in the second supplementary budget.

The vaccine-related budget has also been significantly increased. On the 20th, President Moon Jae-in instructed Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki, saying, "Since there are various variables such as the emergence of new variants and lowering the vaccination age, prepare the vaccine budget generously to be fully prepared for COVID-19 response."

A considerable budget will also be invested in resolving polarization. Significant budget support will be sought for transforming the business structure of self-employed individuals and promoting smart and online business models. The budget is being prepared with an emphasis not only on supporting self-employed individuals currently facing difficulties but also fundamentally improving the structure of self-employment through digital transformation.

Additionally, emphasis was placed on reducing educational and care disparities by increasing child allowances and expanding national scholarships.

More than 30 trillion won will be allocated next year for New Deal 2.0-related budgets. This is the result of adding the Human New Deal to the 'Digital' and 'Green' focused New Deal. A plan to establish a climate response fund to achieve carbon neutrality by 2050 is also under consideration. There are many voices calling for an increase in the size of the climate fund to actively reduce greenhouse gas emissions. The carbon neutrality budget, including the climate fund, is expected to increase significantly.

On the 19th, the Carbon Neutrality Basic Act (Climate Crisis Response Act), which includes the legal basis for establishing the climate response fund, passed and is awaiting plenary session approval. According to the law, the climate response fund's resources will consist of 7% of the transportation, energy, and environmental taxes each year, revenue from the paid allocation of greenhouse gas emission permits, contributions from the government or other institutions, and so on. In the past three years, transportation, energy, and environmental tax revenues were 13.9379 trillion won in 2020, 14.5627 trillion won in 2019, and 15.3349 trillion won in 2018. If transportation, energy, and environmental tax revenues continue to exceed 15 trillion won annually, 7% of that, over 1 trillion won, will be allocated to the climate response fund.

Revenue from the paid allocation of greenhouse gas emission permits was about 250 billion won last year. Until last year, the paid allocation rate was 3%, but it expanded to 10% this year. The 10% rate will be applied until 2025, and there are plans to consider increasing it further afterward. Accordingly, this year's and next year's revenue from paid allocation of greenhouse gas emission permits could reach about 700 billion won, three times last year's amount. Approximately 1.8 trillion won will be secured as fund resources from transportation, energy, environmental taxes, and paid allocation revenues. The government is expected to add contributions to form the climate response fund.

Meanwhile, national debt, projected to be 964 trillion won by the end of this year, is expected to exceed 1,000 trillion won by the end of next year. When the second supplementary budget was prepared, this year's national tax revenue was estimated to be about 31.5 trillion won higher than this year's main budget, which will reduce the deficit of the integrated fiscal balance relative to GDP. The deficit ratio of the integrated fiscal balance to GDP is expected to drop from -4.4% this year to the low to mid-3% range next year.

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