This Year’s Fiscal Deficit Exceeds 150 Trillion Won... Concerns Over Reinvoking 'Bank of Korea Act Article 75' Amid Lee and Yoon’s Generosity

This Year's Deficit Forecast Already Surpasses 110 Trillion... Renewed Concerns Over Bank of Korea's Direct Participation in Government Bond Issuance Market

[Asia Economy Sejong=Reporters Kwon Haeyoung and Moon Jewon] This year’s fiscal deficit forecast has already exceeded 110 trillion won. Both ruling and opposition presidential candidates have promised to invest 50 trillion won in support of small business owners, signaling the possibility of a large-scale second supplementary budget (supplementary budget) immediately after the presidential election. Some predict that the national fiscal deficit could surpass 150 trillion won by the end of the year. In political circles, there are still calls for an expanded role of the Bank of Korea, such as purchasing government bonds after the new government takes office, raising concerns that the dormant "Bank of Korea Act Article 75" may be revived.

According to the National Assembly Budget Office on the 7th, with the passage of a supplementary budget worth 16.9 trillion won last month, the managed fiscal balance deficit for this year is expected to widen to 110.8 trillion won.

The managed fiscal balance is the figure obtained by subtracting the four major social security funds from the "integrated fiscal balance," which is the net revenue minus net expenditure of the central government. It provides a clear view of the actual state of the national finances. Initially, based on the 2022 main budget, a deficit of 94.1 trillion won was expected, but with the passage of this supplementary budget, the deficit is projected to increase to 110.8 trillion won, according to the budget office. With both ruling and opposition presidential candidates proposing large-scale fiscal spending pledges, there is a possibility that the fiscal deficit could exceed 150 trillion won by the end of the year.

In this context, there are already calls within political circles for an expanded role of the Bank of Korea. A policy committee official from the Democratic Party said, "If the government is to secure large-scale funds, there is practically no alternative other than issuing deficit-covering bonds," adding, "Since the current Bank of Korea Act (Article 75) allows the Bank of Korea to directly purchase government bonds from the government, it is worth discussing the possibility of the Bank of Korea directly participating in the primary market rather than just the secondary market for government bonds in the future."

The government’s funding methods can be broadly divided into expenditure restructuring, tax increases, and deficit bond issuance. To secure tens of trillions of won through budget cuts, spending on large social overhead capital (SOC) projects must be reduced. However, this is practically impossible due to strong opposition from local constituency lawmakers. Tax increases are also difficult as they may provoke public backlash. Ultimately, issuing deficit-covering bonds is the easiest method, but the market’s capacity to absorb government bonds is gradually declining. The net increase in government bonds, which directly leads to an increase in national debt, is expected to exceed 100 trillion won for the third consecutive year, following 115.3 trillion won in 2020, 120.6 trillion won in 2021, and an estimated 104.7 trillion won this year.

This is not the first time such claims have emerged from the ruling party. Last year, the Democratic Party proposed bills for the Bank of Korea to purchase government bonds issued for COVID-19 loss compensation. At that time, both the Ministry of Economy and Finance and the Bank of Korea opposed the bills, but there is a considerable possibility that the issue will be reignited after the presidential election. In South Korea, the proportion of government bonds held by the central bank relative to the total government bond issuance is 3.4%, which is lower than that of the United States (22.4%), Japan (46.2%), and the United Kingdom (41.6%), so political pressure on the Bank of Korea may increase. However, looking at overseas cases, most major countries such as the United States, the European Union (EU), and China completely prohibit direct purchases of government bonds by central banks.

A Ministry of Economy and Finance official said, "The government must issue government bonds in an appropriate amount within the volume that the market can absorb," adding, "The Bank of Korea is already simply purchasing government bonds, but using its issuance authority to participate in the primary market is not seen in advanced countries and could cause a decline in international creditworthiness."

A Bank of Korea official also pointed out, "Article 75 of the Bank of Korea Act was a law designed to assist government financing when the government had difficulty raising funds due to an underdeveloped government bond market during the developmental economy era, and it does not fit the current situation in Korea where the bond market is well developed."

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