The Korea Herald


S. Korea drafts record-high budget of W555.8tr for 2021

Market observers worry about W945tr sovereign debt

By Bae Hyunjung

Published : Sept. 1, 2020 - 17:06

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Deputy Prime Minister and Finance Minister Hong Nam-ki. (Yonhap) Deputy Prime Minister and Finance Minister Hong Nam-ki. (Yonhap)

South Korea on Tuesday unveiled a record-high state budget worth 555.8 trillion won ($469.87 billion) for 2021, up 8.5 percent from this year, in continued efforts to revitalize the economy amid the COVID-19 fallout.

The expansionary policy road map and the consequent rise in sovereign debt, however, rekindled worries about the nation’s fiscal soundness.

“Next year will be the golden time for our economy, when we should exert all efforts to overcome the COVID-19 crisis and brace for a post-coronavirus paradigm shift,” Deputy Prime Minister and Finance Minister Hong Nam-ki said at the Cabinet meeting at the Seoul Government Complex.

“Finance should act as the last bastion for the nation’s economy in time of crisis, and we believe that next year’s budget will play that essential role.”

The Ministry of Economy and Finance submitted the yearly state budget for 2021, with expenditures totaling 555.8 trillion won, up 8.5 percent from this year. The budget plan, upon the Cabinet’s approval, is to be handed over to the National Assembly on Thursday, with the final deadline set for Dec. 2.

The 8.5 percent on-year rise in spending was down from the 9.1 percent rise for this year and 9.5 percent for 2019, but indicated that Asia’s fourth-largest economy will extend its expansionary moves throughout next year amid prolonged coronavirus damage. It also marked the second consecutive fiscal year in which expenditures are to outrun revenues.

To make up for the deficiency, the Korean government will issue some 90 trillion won worth of deficit-covering bonds, according to the ministry.

As a result, the country’s sovereign debt is expected to increase 6.9 percent on-year to 945 trillion won next year, with its fiscal deficit reaching 5.4 percent of the gross domestic product and its debt to gross domestic product ratio surging to 46.7 percent.

Of the total yearly budget, 30.6 trillion won will be used to create jobs, marking a 20 percent rise from the previous year. Spending on social welfare will also be increased by 10.7 percent on-year to 199.9 trillion won.

The fiscal allocation for education and national defense will fall 2.2 percent and 5.5 percent, respectively.

Addressing the concerns about the increased fiscal burden and sovereign debt, the fiscal chief said the ongoing epidemic crisis is the top priority.

“Under the current wartime circumstances, we should endure some temporary debts and deficits,” Hong said.

What is more important is that finance should play an active role to boost growth and improve fiscal soundness, establishing a virtuous circle, Hong said, pointing out that most Group of 20 states have adopted similar expansionary policies.

“It is nevertheless true that the fast-increasing debt is weighing down upon (Korea’s) fiscal policy space so (the government) will enhance efforts to improve fiscal soundness in a midterm perspective,” he added.

The finance minister also stressed that the government had not considered tax hikes at all when drafting the budget plan, as any drastic changes to tax rates would require a national consensus.

As for the economic growth outlook for this year, Hong vowed all efforts to attain the previously suggested target, while acknowledging the mounting challenges.

“Should the latest uptrend in the number of coronavirus confirmed patients prolong until the end of this year, we will inevitably face an economic contraction this year,” he said.

“But the government has earlier suggested the on-year growth target of 0.1 percent and will use every means necessary to achieve this goal, without additional adjustments to the current outlook.”

Last week, the Bank of Korea cut its economic growth outlook for this year, predicting a contraction of 1.3 percent, down drastically from the 0.2 percent contraction suggested in May.

The latest adjustment by the central bank marked the worst since the 5.1 percent contraction observed in 1998 when the country was experiencing the Asian financial crisis.

Despite the ministry’s optimistic stance, however, experts in the private sector are increasingly expressing concern about the fast-rising sovereign debt level.

“It is true that major leading economies have seen their debt level rise this year, due to expansionary fiscal actions in light of COVID-19,” said Cho Young-mu, senior researcher at the LG Economic Research Institute.

But most are also making efforts to bring the debt ratio back to the conventional level next year, he said, adding that Korea’s ever-expansionary policy road map constitutes a rare case.

“When non-key currency states such as Korea saw their state debt level hike within a short period of time, they have been observed to soon face a sovereign credit rating cut and a consequent impact on the investment market,” Cho said.

By Bae Hyun-jung (