National Debt Swelling Like a Snowball... Ruling and Opposition Parties Pressure for 'Super Supplementary Budget'

Despite Deputy Prime Minister Hong Nam-gi's Opposition, Prime Minister Kim Bu-gyeom Possibility Suggested
Expansion of Small Business Support Finance, Concerns Over Interest Rate and Inflation Rise Vicious Cycle

[Asia Economy Sejong=Reporter Kwon Haeyoung] The government, which had resisted demands from the political sphere to increase the supplementary budget (추경), has now left open the possibility of an increase based on bipartisan agreement, raising concerns that the national debt will grow at an even steeper pace. With the national debt already surpassing 1,000 trillion won, if second and third supplementary budgets are prepared after the March presidential election, there are worries that fiscal soundness and external creditworthiness could be shaken. There are also growing voices warning that the government's expansionary fiscal policy could stimulate interest rates and prices, thereby exerting upward pressure on inflation.

◆The frightening speed of national debt increase, but will the supplementary budget ultimately be increased?＝According to the Korea Financial Investment Association on the 7th, the outstanding issuance of government-guaranteed 'national bonds' and 'special bonds' exceeded 1,300 trillion won in November last year, increasing by 100 trillion won in just nine months after surpassing 1,200 trillion won in February 2021.

The speed of national debt growth has accelerated sharply since the Moon Jae-in administration. It took 37 months for the outstanding issuance of national and special bonds to exceed 900 trillion won in February 2016 and then surpass 1,000 trillion won in March 2019. However, it took only 14 months to reach 1,100 trillion won in May 2020, and just 9 months each to reach 1,200 trillion won in February 2021 and 1,300 trillion won in November of the same year.

This is also why Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki resisted even when the ruling and opposition parties agreed to increase the supplementary budget. However, Prime Minister Kim Boo-kyum appeared before the National Assembly Budget and Accounts Special Committee on the same day and hinted at the possibility of increasing the supplementary budget based on bipartisan agreement, putting the fiscal authorities in a corner once again. Although Prime Minister Kim mentioned expenditure restructuring, to increase the supplementary budget to the 35 trillion to 50 trillion won level demanded by both parties, issuing deficit-covering bonds seems inevitable. Looking at the annual issuance of deficit-covering bonds, it steadily increased from 34.3 trillion won in 2019 to 60.2 trillion won in 2020 and 96.2 trillion won in 2021. The national debt exceeded 1,075 trillion won in 2022, including deficit-covering bonds from this supplementary budget, up from 660.2 trillion won in 2017, the first year of the Moon administration.

Professor Sung Tae-yoon of Yonsei University's Department of Economics expressed concern, saying, "Not only preparing a supplementary budget at the beginning of the year but also increasing it can cause misunderstandings in the context of the political schedule," adding, "The increase in national debt burden will strain national creditworthiness and fiscal soundness."

◆The 'shadow' of the supplementary budget stimulating interest rates, prices, and exchange rates＝The problem is that expansionary fiscal policies such as supplementary budgets to support self-employed individuals could trigger a domino effect of rising interest rates and prices. Especially, with monetary tightening policies in South Korea and the United States entering the final countdown, combined with the government's successive supplementary budgets, government bond yields are rising, and prices are soaring globally due to the liquidity released worldwide.

According to the bond market, the yield on 3-year government bonds rose from 1.03% per annum on March 17, 2020, when the first supplementary budget for COVID-19 was confirmed, to 2.19% on June 4 this year, an increase of over 1 percentage point. The government submitted a supplementary budget bill of 14 trillion won, the first 'January supplementary budget' in history, to the National Assembly on May 24, covering 11.3 trillion won of it through deficit-covering bond issuance. When the supply of government bonds increases in the market, bond prices fall and yields rise. Rising government bond yields then affect loan interest rates, worsening funding conditions for households, the self-employed, and businesses.

Prices have surged to the highest level in 10 years, maintaining a 3% range for four consecutive months since October last year, increasing the burden on ordinary citizens. According to the minutes of the Bank of Korea's Monetary Policy Committee meeting, one committee member expressed concern, stating, "The economic burden caused by inflation weighs more heavily on low-income groups dependent on earned income than on high-income groups with substantial assets," adding, "The income redistribution effect of government transfer payments may be partially offset by inflation."

Professor Kang Sung-jin of Korea University’s Department of Economics warned, "The Bank of Korea is trying to withdraw liquidity, but the government and political circles continue to pump money, creating a mismatch, leaving the Bank of Korea fighting a lonely battle alone," adding, "The government's and political circles' populist money spending stimulates prices and interest rates, forcing the Bank of Korea to raise rates again, potentially repeating a vicious cycle."

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