[Opinion] Future-Ready Investments Create Fiscal Virtuous Cycle

Kim Jeong-hoon, Director of the Fiscal Policy Research Institute

The 2022 budget proposal has been announced. It is often referred to as a policy expressed in numbers, and looking at the contents of the budget proposal, this expression feels very accurate. Next year's defense budget is 55.2 trillion won, which increased by about 10 trillion won from 2010 to 2017, and then increased by another 15 trillion won over the following five years. During the same period, the R&D budget also increased by approximately 4 trillion won and 10.3 trillion won, respectively. The social expenditure budget, which increased by 48.3 trillion won from 2010 to 2018, has increased by an additional 87.2 trillion won over the past five years. This reflects the policy direction of the Moon Jae-in administration.

However, there is concern about whether Korea's fiscal capacity can support such an increase in spending. In 2022, total expenditures amount to 604.4 trillion won, while total revenues are 548.8 trillion won, resulting in a fiscal deficit of 55.6 trillion won. Excluding the surplus of the National Pension Service, the management fiscal deficit reaches 94.7 trillion won. This is equivalent to 4.4% of GDP, which is by no means a small amount. Especially considering that the management fiscal deficits in 2017 and 2018 were 18.5 trillion won and 10.6 trillion won respectively, managing the rapidly increasing national debt after the COVID-19 crisis will be the biggest challenge for future fiscal policy.

The rapid increase in national debt is certainly a matter of concern, but judging the appropriateness of the national debt scale is not easy. Currently, European countries operate fiscal rules to keep the national debt-to-GDP ratio below 60%. However, Olivier Blanchard, former MIT professor and IMF chief economist who developed this indicator in the early 1990s, recently emphasized that since government bond interest rates have fallen below economic growth rates, it is much more important to secure growth engines and increase employment rates through proactive fiscal policy rather than being constrained by the size of national debt itself. A recent IMF report on Korea’s economy and fiscal situation also diagnosed that, amid aging and slowing consumption, it is crucial for the government to respond quickly to secure growth engines and restore economic vitality from COVID-19.

The basic direction of next year’s budget is set as ‘complete recovery’ and ‘leap to a global powerhouse,’ especially including future-oriented investment budgets such as Digital New Deal, Green New Deal, carbon neutrality, and advanced SOC (Social Overhead Capital). As Professor Blanchard emphasized, in a situation where the burden of national debt is low, strengthening growth potential through future-oriented investments funded by government bonds can create a virtuous cycle in the economy and fiscal policy. Looking at the economic and fiscal situation of OECD countries after the COVID-19 crisis, Korea is still in a favorable position to secure a virtuous cycle structure. Korea’s national debt level is lower compared to major OECD countries (United States, United Kingdom, France, Japan, Germany, etc.), and it is leading in areas such as digital, bio, and advanced SOC.

Considering the low government bond interest rates and Korea’s sound national debt level, it is a desirable budget policy direction to accept a certain level of increase in national debt while securing growth engines and strengthening social safety nets. Efforts to visibly and strongly promote expenditure structure adjustment and fiscal restructuring to reduce the fiscal deficit should also be an important pillar of fiscal policy supporting the leap to a global powerhouse in the medium to long term.

Kim Jeong-hoon, Director of the Fiscal Policy Institute

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