The ruling Democratic Party of Korea is pushing to pass yet another supplementary budget worth up to 30 trillion won ($27 billion) as early as in July, deepening concerns over the country’s deteriorating fiscal soundness.
The party’s floor leader, Rep. Yun Ho-jung, said Tuesday that an extra budget was urgently needed not only to help those hit hardest by the coronavirus pandemic but to give relief cash handouts to all people. He said consultations with the administration had yet to be held, hoping budget planners would submit a supplementary budget bill in July so that the parliament could pass it by the end of the month.
In June, the National Assembly plans to enact a law aimed at compensating for losses incurred on small business owners due to social distancing rules imposed to curb the spread of COVID-19. A supplementary budget needs to be drawn up to fund the compensation estimated to reach 6.6 trillion won. Ruling party lawmakers seek to include universal cash handouts and other support programs, including paid leave for vaccinated people, in the envisioned extra budget, pushing up the sum to as much as 30 trillion won.
The additional spending plan would be the second extra budget this year and the ninth one since President Moon Jae-in’s administration assumed office in May 2017. The amount of the eight extra budgets implemented by the Moon government so far exceeds the sum implemented by the administrations of Moon’s three immediate predecessors -- Roh Moo-hyun, Lee Myung-bak and Park Geun-hye.
The ruling party’s push for the passage of another supplementary budget comes after Moon said last week that the country needs to maintain expansionary fiscal policy at least until next year despite a hike in national debt. In an annual meeting on fiscal strategy, Moon said that it is true that South Korea’s national debt has rapidly increased in the course of coping with the fallout from the coronavirus pandemic but noted that its fiscal conditions remain relatively sound, compared with other major economies.
His remarks are not in line with the reality.
The country saw its national debt increase at a steep pace before the coronavirus outbreak early last year as the Moon government increased fiscal spending to offset the negative effects of its ill-conceived policies as well as finance expanded welfare programs.
Global credit appraiser Moody’s Investors Service said last month that Korea’s long track record of fiscal discipline was expected to be put to test as its record-high government debt will likely increase further.
When putting forward a supplementary budget bill worth 19.5 trillion won in March, the Ministry of Economy and Finance forecast the country’s national debt would reach 965.9 trillion won by the end of the year, with the ratio of national debt to its gross domestic product standing at 48.2 percent. The implementation of the envisioned extra budget would push up the amount of national debt above 1,000 trillion won for the first time and the national debt-to-GDP ratio above 50 percent. In 2017 when Moon took office, the country’s national debt remained at 660 trillion won, with the national debt-to-GDP ratio hovering around 36 percent.
Consolidated fiscal balance turned from a surplus of 24 trillion won in 2017 to a deficit of 71.2 trillion won in 2020.
What emboldens Moon and his ruling party to push for another extra budget is a higher-than-expected rise in tax revenues this year. Tax revenues increased by 19 trillion won from a year earlier in the first quarter of the year, largely due to an improvement in corporate earnings and a rise in property-related levies.
What is worrying is that Moon and his ruling party will be tempted to increase fiscal spending even more in the run-up to the next presidential vote in March and local elections to he held nationwide two months later.
Fiscal surpluses should be used to reduce the national debt to help lessen the burden on future generations. According to a report released Monday by the private think tank Korea Economic Research Institute, the net tax burden to be imposed on the shoulders of people born in 2019 and thereafter is estimated to have grown by 143 million won over the past year.
Fiscal expansion also needs to be reined in at a time when it is difficult to tighten monetary policy in the near future. A continuous increase in government spending coupled with easy monetary policy risks accelerating inflation.
