The US and Europe Cut Budgets... Only Korea Pursues 'Ultra-Expansionary Fiscal Policy'

Lower Limit of Compensation for Self-Employed Losses Set at '500,000 Won'...Significant Expansion of Budget for 'Lee Jae-myung's' Local Gift Certificates
SOC Budget Increased by Over 1 Trillion Won
National Debt to Surpass '1,000 Trillion Won' Next Year...Debt Equals Half of GDP

[Asia Economy reporters Son Seon-hee (Sejong), Jang Se-hee, and Moon Je-won] The Moon Jae-in administration, by formulating a ‘super expansionary fiscal policy’ until the last year of its term, is being criticized for going against the global trend of fiscal restraint. Meanwhile, the national debt-to-GDP ratio has surpassed 50%, making the burden on future generations inevitable.

Especially with the presidential election scheduled for March next year, a large-scale budget including one of Lee Jae-myung, the Democratic Party’s presidential candidate’s key pledges?‘local currency issuance of 30 trillion won (based on issuance)’?was fully reflected, and the budget for social overhead capital (SOC) was increased by more than 1 trillion won. To meet political demands, the government unusually raised total revenue estimates by 4.7 trillion won. This means that just three months after submitting the government proposal (in September), revenue estimates ballooned by several trillion won like a rubber band.

◆ Increasing compensation for losses and injecting national funds into Lee Jae-myung’s local gift certificate issuance = According to the National Assembly and Ministry of Economy and Finance on the 3rd, the expenditure item with the largest increase during the National Assembly review process was the customized support budget for small business owners, which increased by 2 trillion won. The minimum compensation amount was raised from the existing 100,000 won to 500,000 won, and the budget for financial support was also increased. In addition, the budget for purchasing oral COVID-19 treatments and expanding beds for severe patients was increased by 1.4 trillion won.

The unit price for Nuri childcare fees for children aged 3 to 5 was also raised by 20,000 won, increasing the livelihood support budget by 1.4 trillion won. Furthermore, the issuance volume of local love gift certificates, considered ‘Lee Jae-myung’s budget,’ was greatly expanded with national treasury support, increasing the related local economy activation budget by 1.7 trillion won. Additionally, 2.4 trillion won was invested to strengthen local finances such as local allocation tax.

Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, said, "This is my 10th budget bill passage as Deputy Prime Minister (3 regular budgets, 7 supplementary budgets). I feel a heavy responsibility to promptly execute the budget confirmed by the National Assembly so that it can help stabilize people’s livelihoods and economic recovery."

Deputy Prime Minister for Economic Affairs Hong Nam-ki is giving a proposal explanation regarding next year's budget bill at the National Assembly plenary session on the 3rd. Photo by Yoon Dong-joo doso7@

With next year’s presidential and local elections and a significant strengthening of the government’s real estate policy, the Ministry of Land, Infrastructure and Transport’s budget was set at an all-time high. According to the Ministry, the 2022 budget and funds under its jurisdiction total 60.7995 trillion won, an increase of 3.742 trillion won (6.6%) compared to this year. The social infrastructure sector accounts for 22.7913 trillion won, and the housing and basic living welfare sector accounts for 38.0082 trillion won. The budget size increased due to the prolonged COVID-19 pandemic expanding the need for housing support for vulnerable groups and the government significantly increasing public-led supply such as public rental housing.

In particular, the SOC sector increased by more than 1 trillion won from 21.6 trillion won this year to 22.8 trillion won next year. This is interpreted as a result of a large number of populist budgets allocated ahead of next year’s presidential election for national balanced development, regional hub cultivation, and transportation network expansion. Especially, 1.9278 trillion won was allocated for the construction of the metropolitan area express railway (GTX) lines A, B, and C and the Shinbundang Line, which are of great interest to residents of the metropolitan area, an increase of 546.2 billion won compared to this year.

To increase populist budgets, next year’s research and development (R&D) budget was cut by 300 billion won, and the defense budget was reduced by 600 billion won. Additionally, the diplomacy and unification budget was cut by 100 billion won, and the safety-related budget was also reduced by 100 billion won.

Total revenue is 553.6 trillion won, 4.7 trillion won higher than the government proposal. Regarding the 7.6% increase compared to the government proposal, the Ministry of Economy and Finance explained that it reflects changes in national tax revenue factors. However, since the government decided to defer comprehensive income tax for small business owners and self-employed individuals on August 26, before the government budget proposal was submitted on September 3, there are criticisms that the reason for raising revenue estimates within just three months is not sufficiently explained.

◆ The era of ‘1,000 trillion won’ national debt... Debt ratio at 50% = Next year’s national debt will increase by 108.4 trillion won from this year to 1,064.4 trillion won. This is the first time in history that the national debt has surpassed 1,000 trillion won. The national debt-to-GDP ratio is 50.0%, up 2.7 percentage points from 47.3% this year. This means that all economic agents in the country are carrying debt equivalent to half the value they produce in one year.

Globally, as vaccines are distributed, it is expected that the shock from the COVID-19 crisis will lessen and economic recovery will gradually unfold after next year. Accordingly, major countries such as the United States have already begun ‘fiscal normalization’ by reducing total expenditures. In fact, the U.S. passed a budget for next year that is about 17.1% lower than this year’s estimated final accounts, and Germany (-19.1%) and France (-8.1%) also reduced their budget sizes for next year.

There are criticisms that Korea is recklessly maintaining an expansionary fiscal stance, going against the global trend of fiscal restraint. Professor Kim Tae-gi of Dankook University’s Department of Economics said, "While countries like the U.S. and Germany are moving toward reducing fiscal spending again, Korea’s expenditures are increasing by nearly 9%. Especially with populist budgets reflected ahead of elections, spending has unnecessarily increased." He added, "There is a limit to economic growth driven by fiscal policy, so side effects may appear in the investment sector in the future. A shift in fiscal policy to prepare for social structures such as low birthrate and aging is necessary."

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