This Year Marks the 4th Consecutive Deficit in National Budget... Concerns Over Twin Deficits in Finance and Trade

Trade Balance Expected to Show Deficit for Three Consecutive Months from December Last Year to This Month
Risk of Sovereign Credit Rating Downgrade and Foreign Currency Outflow if Fiscal Soundness Crisis and Trade Deficit Persist

[Asia Economy Sejong=Reporter Kwon Haeyoung] For the first time since the foreign exchange crisis, the government has run a budget deficit for three consecutive years, and this year, spending is expected to exceed revenue again, marking the first-ever four consecutive years of deficit. To make matters worse, the trade balance deficit caused by the sharp rise in crude oil and other raw material prices has added to concerns that this year could see a 'twin deficit' in both the fiscal balance and the current account balance.

According to the 'Monthly Fiscal Trends and Issues February Edition' released by the Ministry of Economy and Finance on the 17th, last year's total revenue was 570 trillion won, an increase of about 56 trillion won compared to the second supplementary budget (supplementary budget) in July last year. Among this, national tax revenue was estimated at 344.1 trillion won, up 29.8 trillion won compared to the second supplementary budget. This was due to a sharp increase in real estate tax revenue and corporate tax growth from economic recovery. Last year's total expenditure reached a record high of 600 trillion won, an increase of 50 trillion won from the previous year, due to COVID-19 damage support, quarantine response, and economic backing.

The Ministry of Economy and Finance estimates that the integrated fiscal balance (central government total revenue minus total expenditure), which shows the state of the national budget, will reach about 70 trillion won this year, including the first supplementary budget, following a deficit in the 30 trillion won range last year. This is on the verge of setting a bitter new record of four consecutive years of integrated fiscal deficits since statistics began in 1970. With the possibility of additional supplementary budgets after the new government took office, the fiscal deficit is expected to widen further this year.

Warning lights have also turned on for trade, the driving force of the Korean economy. The trade balance, which accounts for most of the current account balance, recorded deficits in December last year (-452 million dollars), January this year (-4.89 billion dollars), and from the 1st to the 10th of this month (-3.5 billion dollars), making it highly likely to continue a deficit for three consecutive months. Although exports performed relatively well, the sharp rise in raw material prices, especially for energy sources such as crude oil, liquefied natural gas (LNG), and coal, which rely on imports, is the cause. If this situation continues, the so-called 'twin deficit'?deficits in both the fiscal balance and the current account balance?could become a reality this year.

Professor Sung Tae-yoon of Yonsei University’s Department of Economics said, "Before the 1997 foreign exchange crisis and the 2008 financial crisis, trade deficits surged rapidly. In a situation where fiscal soundness is deteriorating and national creditworthiness is at risk, if the trade balance worsens and foreign exchange reserves decrease, it will place a heavy burden on the economy. Therefore, it is necessary to strengthen macroeconomic risk management, including fiscal soundness and foreign currency management."

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