South Korea’s fiscal deficit tops W100tr as spending surged amid COVID-19

South Korea’s fiscal deficit reached over 100 trillion won ($83 billion), while national debt logged a deficit of 240 trillion won, as the country was bogged down by COVID-19 woes in the past two years, data from the Finance Ministry showed Sunday.

With an additional 70 trillion won in fiscal deficit and 100 trillion won of national debt projected to be added this year, based on the size of the supplementary budget currently being discussed by officials and lawmakers, onlookers are expressing concerns over the fiscal soundness.

In 2020, the Moon Jae-in administration logged a deficit of 71.2 trillion won for the consolidated fiscal balance, a key gauge of fiscal soundness, when the nation confirmed its first COVID case in January. Korea saw a deficit of 30 trillion won last year, meaning that the total fiscal deficit in the pandemic era so far amounts to some 101 trillion won.

Sunday’s fiscal deficit data comes as the government has been posting robust total income backed by an increase in tax revenue and fast recovery in exports, which accounts for some half of the nation’s economy.

For fiscal 2021, the country’s total income, including tax revenue, tentatively came to a total 570 trillion won, up from its earlier estimate of 514.6 trillion won. Gross expenditures increased 50 trillion won on-year to 600 trillion won.

Korea’s tax revenue gained 58.5 trillion won on-year in 2021, while the country’s excess tax revenue came to 61.4 trillion won.

The government raked in 344.1 trillion won in taxes last year, up from 285.5 trillion won the previous year, according to the ministry. In December last year, the tax revenue increased 2.9 trillion won on-year to 20.7 trillion won.

On Friday, President Moon Jae-in called for the National Assembly to swiftly approve an extra budget proposal of 14 trillion won that was submitted last month, with political parties already floating ideas of bigger government spending.

The ruling Democratic Party called for a 35 trillion won extra budget, while the main opposition People Power Party demanded a 50 trillion won supplementary budget.

Meanwhile, deputy prime minister and Finance Minister Hong Nam-ki has expressed concerns over the political parties’ push to beef up this year’s extra budget ahead of the March presidential election. He explained that the debt-to-gross domestic product ratio could gain 2 percentage points from the ministry’s estimate if the budget size is jacked up to 35 trillion won, Hong told a parliamentary meeting on Feb. 8.

With the proposed 14 trillion won extra budget, the national debt is already forecast to reach 1,075.7 trillion won this year and the debt-to-GDP ratio is expected to rise to a record high of 50.1 percent, according to a government projection.

Hong added that global credit agencies have expressed concerns of the nation’s growing national debt, which has been gaining pace.

Last month, Fitch Ratings said a sustained rise in the country’s government debt ratio could affect Korea’s sovereign rating for the interim period. Asia’s fourth-largest economy’s shift toward expansionary fiscal spending and tolerance of fiscal deficits appear to be becoming more “entrenched,” it said.

On top of that, presidential candidates have also pledged further financial support for small-business owners, which has prompted experts to advise the government to set up a task force to deal with debts and spending.

“South Korea is expected see an average 2 or 3 percent gain in its debt-to-GDP ratio annually from now on,” said Kim Woo-cheol, a taxation professor at University of Seoul.

“The presidential candidates’ current pledges are projected to fuel the gain, which is why a special task force is needed to come up with a plan for spending,” he added.

By Jung Min-kyung (mkjung@heraldcorp.com)