Due to COVID-19 Disaster Relief Payments... Last Year Central Government Deficit of 73 Trillion Won, Largest Since 2007

Bank of Korea '2020 Public Sector Accounts (Provisional)'

[Asia Economy Reporter Eunbyeol Kim] Last year, the central government incurred a deficit close to 73 trillion won due to the exceptional disbursement of COVID-19 disaster relief funds. This is the largest deficit since the Bank of Korea (BOK) began compiling statistics in 2007.

According to the '2020 Public Sector Accounts (Provisional)' released by the BOK on the 16th, the central government's balance, calculated by subtracting total expenditures (428 trillion won) from total revenues (355.2 trillion won) last year, recorded a deficit of 72.8 trillion won. Among the national accounts compiled by the BOK, the public sector central government balance differs from the integrated fiscal balance compiled by the Ministry of Economy and Finance in terms of the scope of institutions covered, included items, and accounting standards (cash basis vs. accrual basis).

This scale of central government deficit is the largest since statistics began in 2007, nearly double the 36.9 trillion won deficit in 2019.

Due to the impact of COVID-19, tax revenues such as corporate tax decreased, causing the central government's total revenue to fall by 2.5% compared to the previous year. However, total expenditures surged by 33.4%, mainly due to transfer payments to the private sector such as disaster relief funds.

The local government balance also turned from a surplus of 16.9 trillion won in 2019 to a deficit of 9.9 trillion won as private sector transfer payments increased. Social security funds, including the National Pension, Government Employees Pension, and National Health Insurance, recorded a surplus of 38.3 trillion won, similar to the 38.4 trillion won surplus in 2019.

Accordingly, the general government balance, which includes central and local governments and social security funds, recorded a deficit of 44.4 trillion won. This is a decrease of 62.8 trillion won from the 18.4 trillion won surplus in 2019 and is also the largest deficit on record since statistics began.

However, the ratio of the general government balance to nominal Gross Domestic Product (GDP) last year was -2.3%, which is lower than the average deficit ratio of -10.8% estimated by the Organisation for Economic Co-operation and Development (OECD) for member countries.

Compared to Japan (-10.1%), the United Kingdom (-12.4%), Australia (-12.3%), the United States (-15.8%), the Euro area (-7.2%), and Switzerland (-2.6%), Korea's general government deficit as a percentage of GDP was lower. Lee In-gyu, head of the Expenditure and National Income Team at the BOK's Economic Statistics Bureau, explained the relatively low deficit ratio of Korea's general government by stating, "Despite COVID-19, Korea's economic situation last year was better than that of other countries, and while nominal GDP decreased in most countries, Korea's nominal GDP slightly increased."

Last year, the total revenues and expenditures of non-financial public enterprises were 172.9 trillion won and 180.2 trillion won, respectively, decreasing by 1.3% and 1.1% compared to the previous year. The balance was a deficit of 7.3 trillion won, with the deficit increasing by 400 billion won. Financial public enterprises saw total revenues (37 trillion won) and total expenditures (36 trillion won) decrease by 7.3% and 2.1%, respectively. As a result, they recorded a surplus of 1.1 trillion won, less than the 3.2 trillion won surplus in 2019.

When combining the general government, financial, and non-financial public enterprises, total revenues of the public sector (883.4 trillion won) increased by only 0.6% over one year, but total expenditures (934 trillion won) surged by 8.1%. Consequently, the public sector deficit last year was recorded at 50.6 trillion won, the largest deficit in 11 years since 2009 (-58 trillion won).