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(News Focus) Record budget proposal spawns concerns over fiscal soundness

All News 11:10 August 31, 2021

By Kim Soo-yeon

SEOUL, Aug. 31 (Yonhap) -- South Korea's proposal to create a record high budget for next year has rekindled concerns about the growing national debt despite the government's confidence that fiscal soundness will likely improve amid robust tax revenue driven by an economic recovery.

The finance ministry on Tuesday proposed a record state budget of 604.4 trillion won (US$519 billion) for next year, up 8.3 percent from this year's 558 trillion won.

The government said it plans to maintain an expansionary fiscal policy next year to cement the economic recovery, reduce deepening income disparity and prepare for post-pandemic policy initiatives.

"Next year, we need to completely put an end to the COVID-19 crisis and pull off a firm economic recovery," Second Vice Finance Minister Ahn Do-geol told a press briefing Friday.

"We also should preemptively tackle growing income gaps and prepare to leap toward a pace-setting country. That's why we will maintain an expansionary fiscal stance to meet such needs," he noted.

This image, provided by Yonhap News TV, depicts South Korea's fiscal health. (PHOTO NOT FOR SALE) (Yonhap)

The big spending plan is based on the forecast that higher tax revenue is anticipated amid the economic recovery.

With the proposed fiscal spending plan, the country, however, will post a budgetary deficit for the third straight year in 2022, the final year in office for President Moon Jae-in under his five-year single term.

Accordingly, the country's national debt will top the 1,000 trillion-won mark for the first time in history.

Next year, the sovereign debt is expected to amount to 1,068.3 trillion won, up from the estimated 965.3 trillion won for this year, according to the finance ministry's projection.

The national debt will be equivalent to 50.2 percent of the GDP next year and the debt-to-GDP ratio will likely rise to a whopping 58.8 percent in 2025.

South Korea has enough room to expand fiscal spending in response to the COVID-19 pandemic, but experts voiced worries about the rising pace of state debt.

Last year, the national debt grew by the largest-ever amount of 123.7 trillion won on-year to a then record 846.9 trillion won due to massive fiscal spending.

Nevertheless, the government expected a "virtuous cycle," in which expansionary fiscal spending will accelerate the economic recovery and increase tax revenue, thereby helping improve fiscal soundness.

The country is expected to log a smaller fiscal deficit next year from a year ago as tax income will increase in line with the economic rebound, according to the ministry's estimate.

The fiscal deficit is projected to reach 55.6 trillion won in 2022, lower than an anticipated shortfall of 90.3 trillion won for this year. The 2022 deficit will be equivalent to 2.9 percent of the GDP, lower than 4.4 percent for this year.

"Next year will be a turning point as the country will see an improvement in fiscal health with a sharp fall in the fiscal deficit," Choi Sang-dae, a senior ministry official in charge of the budget, told reporters.

This computerized image depicts South Korea's national debt. (Yonhap)

Under the 2021-25 fiscal management plan, the government proposed it will set the annual growth rate of fiscal spending at an average of 5.5 percent over the period.

The government's total expenditures will grow 8.3 percent on-year next year, but the rate will slow to 5 percent in 2023 and further decline to 4.2 percent in 2025, according to the ministry's estimate. If so, its fiscal deficit will likely reach around 3 percent of the GDP by 2025.

But the government's outlook for an improvement in fiscal health may be too rosy in light of mounting welfare costs and political uncertainty over a new administration.

South Korea faces growing pressure on public finances as its chronically low birthrate and rapid aging will sharply jack up welfare costs over the long term.

The country will hold the presidential election in March next year, and a new government, which will be launched in May, could desire a greater fiscal role, depending on its economic policy directions.

Global credit appraiser Moody's Investors Service said in May that Korea's long track record of fiscal discipline is expected to be put to the test as its record high government debt will likely increase further with the expansionary fiscal policy.

sooyeon@yna.co.kr
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