[2024 Budget] Government Tightens Belt... Difficult to Comply with Fiscal Rules Next Year

The core of the '2024 Budget Proposal' announced by the government on the 29th can be summarized into two main points: fiscal normalization and strengthening selective welfare centered on the vulnerable. While this year's budget formulation marked a full transition from the previous administration's expansionary fiscal policy to a sound fiscal stance, next year's budget plan envisions accelerating structural improvement through more intensive fiscal reform.

The total amount of budget restructuring reached 23 trillion won. Following 24 trillion won this year, it is over 20 trillion won for two consecutive years. The Ministry of Economy and Finance stated, "During the process of increasing the budget size, there were cases of duplication, delayed execution, and fraudulent receipt," adding, "To normalize finances, we conducted a fundamental re-examination of validity and effectiveness before carrying out budget restructuring."

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho is delivering opening remarks at a detailed pre-briefing on the '2024 Budget Proposal and the 2023-2027 National Operation Plan' held at the Government Complex Sejong on the 24th.

This policy becomes clearer when looking at the government's allocation plan for budget resources across 12 sectors. Among next year's budget (656.9 trillion won), the sectors with reduced funding are Research and Development (R&D, -16.6%), Education (-6.9%), and General/Local Administration (-0.8%). Particularly, the R&D budget, which had been distributed in a piecemeal manner, took a direct hit. The largest portion of the R&D budget, the 'Science, Technology, and Communications' sector, decreased by 945.5 billion won (9.4%) from 10.0223 trillion won this year to 9.0768 trillion won next year. The education budget dropped sharply by 1.7403 trillion won (58.2%) from 2.9879 trillion won to 1.2476 trillion won, while the industry, small and medium enterprises, and energy sector, which includes compensation for small business losses, decreased by 1.2742 trillion won (16.8%), and social overhead capital (SOC) declined by 290.4 billion won (26.3%).

Subsidy budgets were also comprehensively re-examined. Subsidy projects with poor performance or improper execution were the focus of restructuring. Subsidy budgets increased from 66.9 trillion won in 2018 to 102.3 trillion won last year. Among these, the controversial subsidy for social enterprises was considered for a reduction of about 300 billion won. Subsidies for private organizations, initially set at 6.5 billion won, were cut by about 50% to 3.3 billion won.

The resources secured through budget restructuring were invested in key tasks such as strengthening welfare for vulnerable groups. This is particularly evident in the health, welfare, and employment sector (242 trillion won). The budget growth rate for health, welfare, and employment next year is 7.5%, the second highest after diplomacy and unification (19.5%). A government official emphasized, "Although the fiscal growth rate was restrained, the government's stance of spending where necessary was well reflected by strengthening welfare for the vulnerable."

The problem is that despite minimizing the expenditure growth rate to normalize finances and tightening the belt, the Yoon Seok-yeol administration revealed its own limits regarding the fiscal rule targets it is pursuing. According to the 2023-2027 National Fiscal Management Plan, the deficit ratio of the management fiscal balance next year is projected at -3.9%, a 1.3 percentage point decrease compared to this year (-2.6%). The fiscal rule's core is to manage the deficit ratio of the management fiscal balance within 3% of GDP. However, if the national debt ratio exceeds 60% of GDP, the deficit ratio must be managed within 2%. If the fiscal rule bill had passed as scheduled this year, next year's fiscal deficit ratio would have exceeded the limit by 0.9 percentage points.

The government also stated that the relationship between the fiscal situation and the management fiscal balance was the most challenging aspect during the budget formulation process. On the 25th, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho said in a pre-briefing, "The government estimated that if next year's budget were frozen, the management fiscal deficit would be 3.2%, and to balance the budget with government tax and current income, total expenditure growth would have to be -14%, which is an unrealistic calculation," adding, "In fact, neither option is acceptable to anyone."

Next year's national tax revenue is expected to be 367.4 trillion won, and total fiscal revenue, including non-tax revenue (27.9 trillion won) and fund revenue (216.8 trillion won), is projected at 612.1 trillion won. This is 13.6 trillion won less than this year's 625.7 trillion won. During this period, the average annual growth rate of mandatory expenditures, which mainly include welfare budgets, is 5.0%. Mandatory expenditures, driven by aging and low birth rates, including statutory welfare spending and national debt interest, are expected to rise to 56.1% of total expenditures by 2027, up 2.8 percentage points from 53.3% this year.

On the other hand, discretionary expenditures, mainly R&D and SOC, are expected to grow at an average annual rate of only 2.0% during the same period. Discretionary spending is projected to decrease from 46.7% this year to 43.9% in 2027. The continuously increasing national debt is also a burden. It will rise from 1,134.4 trillion won this year to 1,417.6 trillion won in four years. During this period, the national debt-to-GDP ratio will increase from 50.4% to 53.0%. If tax revenues do not continuously support this, it may become difficult to sustain expenditures in the future.

Professor Kim Sang-bong of Hansung University’s Department of Economics analyzed, "Even if next year's budget growth rate is suppressed as much as possible, the management fiscal deficit may exceed the Ministry of Economy and Finance's expectations," adding, "To balance the budget, expenditures must be restrained, but due to burdens such as current expenditures, it is absolutely not easy to reduce them immediately."

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