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[Editorial] Mounting deficits

Moon government needs to pay heed to warnings about excessive fiscal expansion

In an address marking the third anniversary of his inauguration Sunday, President Moon Jae-in said that his government would lay the cornerstone of the universal unemployment insurance system as part of efforts to strengthen social safety nets.

He also pledged to push for what he described as the Korean version of the New Deal by focusing on future-oriented preemptive investment designed to establish digital infrastructure and create more jobs.

Such initiatives are added to a host of programs he has already announced to cope with the economic fallout from the novel coronavirus outbreak.

Certainly it is no time to prioritize fiscal constraints.

But it is worrisome that the Moon government is paying little attention to growing warnings that South Korea’s fiscal deficit and national debt are increasing too rapidly.

According to a report released by the Ministry of Economy and Finance last week, the country’s overall fiscal balance -- difference between the government’s gross revenue, including taxes and proceeds from asset sales, and its total expenditure -- recorded a deficit of 45 trillion won ($36.6 billion) in the first quarter of this year, the highest on record.

The deficit of managed fiscal balance -- shortfall in the government’s income compared with its spending, excluding social security funds -- also soared to a record high of 55 trillion won in the same period.

The figures exceeded the annual deficits for 2019, which amounted to 12 trillion won for overall fiscal balance and 54 trillion won for managed fiscal balance.

The country’s fiscal imbalance is set to worsen at a steeper pace down the road, as the government continues to increase funding of programs designed to cushion the economic impact of the pandemic.

In his address, Moon suggested that it would be inevitable to draw up yet another supplementary budget within this year.

His government has been implementing two extra budgets worth 24 trillion won combined, each of which was approved by the parliament in March and April, on top of the regular budget for 2020 set at a record high of 512.3 trillion won.

The envisioned third supplementary budget is forecast to reach 30 trillion won.

For the whole year, the country’s overall fiscal balance and managed fiscal balance are projected to record a deficit of 79 trillion won and 119 trillion won, respectively.

This bloated fiscal deficit translates into a spike in national debt.

More than 100 trillion won worth of state bonds should be issued to help finance the regular budget and three additional spending plans amid a continuous decline in tax revenues. According to the Finance Ministry report, the government collected 69.5 trillion won in taxes in the first three months of this year, down 8.5 trillion won from a year earlier.

South Korea’s national debt is estimated to be close to 850 trillion won by the end of the year, accounting for about 45 percent of its gross domestic product.

Fitch Ratings, a global rating agency, warned in February that a rise in the national debt-to-GDP ratio to 46 percent by 2023 could put downward pressure on South Korea’s sovereign credit rating in the medium term.

The Moon government and many ruling party lawmakers have insisted South Korea has considerable room to expand fiscal spending, noting its national debt-to-GDP ratio is much lower than those of other major economies.

The average figure for member states of the Organization for Economic Cooperation and Development stands at 109 percent.

Experts estimate South Korea’s national debt in a broader sense, including debt owed by public corporations and liabilities for state employees’ pensions, reached 100 percent of its GDP in 2018.

It is also insensible to compare South Korea’s debt level with those of other advanced nations on the same footing, as it became an aged society far later and has to sharply increase fiscal expenditure to support elderly people.

With its currency not among key reserve currencies, South Korea could be driven into a credit crisis if its sovereign rating is downgraded due to chronic fiscal deficits, prompting foreign investors to shun its equity and bond markets.

Fiscal spending needs to be sufficient to prevent businesses and households from collapsing in the aftermath of the pandemic crisis. But excessive expansion could run the risk of endangering the national economy as a whole.

The Moon government should set pertinent goals that it wants to achieve by expanding fiscal expenditure, based on the cool-headed analysis of the country’s economic situation. It also needs to have a plan for reducing the fiscal deficit and national debt after the coronavirus crisis eventually ends.
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