[Asia Economy Reporter Kwangho Lee] Amid the Moon Jae-in administration's expansionary fiscal policy, which forecasts a national debt (deficit bond issuance) of 60 trillion won this year, concerns over fiscal soundness are growing as the government plans to issue an additional 10 trillion won in government bonds through a supplementary budget.
According to the Ministry of Economy and Finance on the 4th, the scale of deficit bonds to be issued to finance this supplementary budget amounts to 10.3 trillion won. The government’s issuance of government bonds in the 10 trillion won range is the fourth time since 1998 (11.7 trillion won) during the International Monetary Fund (IMF) foreign exchange crisis, 2009 (15.8 trillion won) right after the global financial crisis, and 2013 (15.7 trillion won) when the Sewol ferry disaster occurred.
The national debt was 805.2 trillion won in this year’s budget, but with the increase in bond issuance due to the supplementary budget, the national debt is expected to reach 815.5 trillion won. In this case, the national debt-to-GDP ratio will quickly jump from 39.8% (based on the government budget) to 41.2%.
An increase in national debt is a natural phenomenon as the scale of national finances grows. The problem is that the pace of national debt growth has been steep due to recent increases in fiscal spending. Based on the 2017 settlement, the national debt was only 660.2 trillion won, but it exceeded 700 trillion won in 2018, and within two years, the national debt has accumulated by more than 100 trillion won.
With this supplementary budget, total spending this year will increase from the existing 512.3 trillion won to 520.8 trillion won, raising the growth rate compared to last year’s budget from 9.1% to 10.9%. Accordingly, the management fiscal balance, an indicator showing the country's fiscal soundness, will expand to an 82 trillion won deficit, equivalent to 4.1% of GDP. This is the highest level since the aftermath of the IMF foreign exchange crisis in 1998. The management fiscal balance deficit ratio to GDP has only exceeded 3% three times: in 1998 and 1999 (3.5%), and during the global financial crisis in 2009 (3.6%).
Experts have expressed strong concerns. Chu Kyung-ho, a member of the Future Korea Party and former first vice minister of the Ministry of Economy and Finance, warned, "If policy failures are compensated by pouring in taxes, fiscal management problems are inevitable," adding, "If national debt rapidly increases, external credit ratings will decline, and international transactions may shrink." Professor Kim Sang-bong of Hansung University’s Department of Economics pointed out, "Considering invisible national debt, the national debt ratio could rise to about 46%, not just 41.2%."
Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, said, "Although the fiscal deficit will temporarily increase, it is an unavoidable choice to overcome the current economic emergency," and added, "We will also strengthen efforts to secure medium- to long-term fiscal soundness."
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
