In a policy consultation Wednesday, the government and ruling party agreed to defer deliberations on the need to draw up yet another supplementary budget this year to cope with the massive damage caused by weeks of heavy rain.
The negative response of policymakers appears to have temporarily silenced calls from the ruling Democratic Party of Korea for additional spending to assist flood relief efforts and support victims across the nation.
So far this year, the National Assembly has approved three supplementary budgets worth nearly 60 trillion won ($50.5 billion) combined, in addition to the 2020 regular budget set at a record high of 512 trillion won.
The ruling party should reflect on its populist steps before pushing fiscal policymakers to draw up an unprecedented fourth extra budget this year.
During the campaign for April’s parliamentary election, it pledged to provide all households with up to 1 million won in emergency relief funds to help cushion the coronavirus pandemic-induced shock.
Finance Ministry officials initially wanted to give rescue funds to families that earn less than the median household income, but caved in to the ruling party’s demand.
They allocated 12 trillion won toward the 14 trillion won needed to fulfill the ruling party’s pledge. Local governments were made to shoulder the remaining 2 trillion won. Many of them diverted funds set aside for natural disasters to the payment of coronavirus rescue money. As a result, they are now left with few resources to cope with the worst flood damage in nearly a decade.
The central government’s reserve fund, which was set at 5 trillion won for this year, has dwindled to about 2 trillion won, as it has been tapped into to help cope with the coronavirus outbreak and finance benefit programs.
Limiting the scope of households eligible for relief funds to those earning less than the median income as planned by the Finance Ministry would have saved 7 trillion won, which might be sufficient to cover the flood damage.
The envisioned fourth supplementary budget would add to South Korea’s ballooning fiscal deficit.
Before the deadly infectious disease began to spread here early this year, the Moon government continued to increase fiscal spending at a steep pace to finance expanded welfare programs and offset the negative effects of its ill-conceived policies, such as the income-led growth drive.
Government data released Tuesday showed that the country posted a record budget deficit in the first half of the year.
Korea’s overall fiscal balance -- the difference between the government’s gross revenue, including taxes and proceeds from asset sales, and its total expenditure -- recorded a deficit of 90 trillion won in the January-June period. During the same period, the deficit of the managed fiscal balance -- the shortfall in the government’s income compared with its spending, excluding social security funds -- amounted to 110.5 trillion won.
Both figures are the highest on record, representing on-year increases of 51.5 trillion won and 51 trillion won, respectively.
The surge in the fiscal deficit is attributable to a sharp decline in tax revenue amid a prolonged economic downturn, coupled with a continual rise in government spending.
National tax revenue amounted to 132.9 trillion won in the first six months of the year, down 23.3 trillion won from a year earlier, according to data from the Finance Ministry.
Over the cited period, state debt soared by 65.1 trillion won to 764.1 trillion won. The figure is estimated to reach 839.4 trillion won by the end of the year, accounting for 43.5 percent of the country’s gross domestic product.
More worryingly, Korea’s fiscal soundness is expected to worsen at a steeper pace down the road.
With national tax revenue forecast to decrease by about 50 trillion won from the government’s initial estimate over the coming three years, state debt is projected to balloon to 1,134.2 trillion won by 2023, equal to 51.7 percent of GDP.
Worsened fiscal conditions might result in the downgrading of the country’s sovereign credit rating, which would increase borrowing and debt-servicing costs and could destabilize local financial markets.
Government policymakers and ruling party lawmakers should refrain from reckless spending that would do little to bolster the country’s economic fundamentals. Fiscal expenditure needs to be restructured to focus on strengthening corporate competitiveness and promoting long-term productivity, which would in turn increase national income and tax revenue.
