[14 Trillion Snowflake Supplementary Budget] National Debt 1075.7 Trillion 'Worst Ever'... Ruling and Opposition Parties Predict 'Increase' Ahead of Election

[Sejong=Asia Economy Reporter Son Sun-hee] Since the inauguration of the Moon Jae-in administration, various fiscal soundness indicators have deteriorated uncontrollably. Over the past five years, spending has ballooned to an unprecedented level, and with the addition of the 10th supplementary budget (supplementary budget) at the end of the term, the national debt-to-GDP ratio surpassed 50% for the first time in history. This means the country is carrying debt equivalent to half of its annual production value.

According to the Ministry of Economy and Finance on the 21st, with the formation of this supplementary budget, the total national debt reached 1,075.7 trillion won, and the debt-to-GDP ratio stood at 50.1%. The national debt ratio was about 36% in 2017, the first year of the administration, increasing by 14.1 percentage points over five years. The purpose of this supplementary budget is to return the much higher-than-expected tax revenue compared to last year's government forecast to small business owners pushed to the limit by COVID-19. However, since there is no way to use the excess tax revenue before the settlement, additional deficit bonds will be issued, increasing total expenditure by 11.3 trillion won.

As government spending increases every year, the integrated fiscal balance (total revenue minus total expenditure) has remained in deficit for four consecutive years since turning negative in 2019. In the first year of the COVID-19 outbreak, the integrated fiscal balance showed a deficit of 71.2 trillion won, which expanded to 75.4 trillion won last year. Thanks to a tax boom fueled by economic recovery since the second half of last year, some national bonds were repaid, and the deficit based on this year's original budget seemed to decrease somewhat (54.1 trillion won deficit), but it worsened again (68.1 trillion won deficit) due to this bond issuance.

Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki is briefing on the 2022 supplementary budget at the Government Seoul Office in Jongno-gu, Seoul on the 21st. Photo by Moon Ho-nam munonam@

The problem is that with the presidential election approaching, both ruling and opposition parties are united in calling for an 'increase' in the supplementary budget. The ruling Democratic Party of Korea demands a supplementary budget size of '25 to 30 trillion won,' while the opposition People Power Party has proposed up to '55 trillion won.' There are concerns that if both parties demand an increase in the supplementary budget during the National Assembly review process immediately after the Lunar New Year holidays, the fiscal authorities will find it difficult to resist.

Moreover, this supplementary budget is not the end; there is a high possibility that a second supplementary budget will be formed immediately after the new government takes office following the presidential election. It is expected that the global surplus from last year's excess tax revenue will be used as a resource in conjunction with the April settlement. Deputy Prime Minister and Minister of Economy Hong Nam-ki recently said at a meeting, "There are several options, such as repaying debt or making a new supplementary budget, and it is a matter to be judged at that time," leaving the possibility open.

To secure the nation's fiscal soundness, the government has submitted a revision bill to the National Finance Act to introduce 'fiscal rules.' Although it is unlikely to pass during this administration, it is a principle set by the government itself. When the national debt ratio and integrated fiscal balance resulting from this supplementary budget are applied to the fiscal rule formula, the level is about 0.89, which meets the government's management target standard (below 1). However, if the supplementary budget size is increased or a second supplementary budget is formed later, there is a high possibility that even the fiscal rules will be broken.

Meanwhile, there are concerns that the government's 'money printing' from the beginning of the year will fuel interest rate hikes and inflation, worsening the pain of the livelihood economy. The government has already rapidly increased the national bond issuance limit over the past two years, increasing the market's burden to absorb the volume. In particular, since national bond yields serve as a benchmark for various market bonds, this not only increases companies' financing burdens but also stimulates various loan interest rates, ultimately harming ordinary citizens.

Regarding related concerns, Deputy Prime Minister Hong said, "Whether interest rates will rise further is entirely a matter for the monetary authority, the Bank of Korea, to decide," and added, "Judging from the fact that most of the supplementary budget funds are transfer payments to self-employed and small business owners, the direct impact on inflation is limited." However, he added, "If the supplementary budget size increases and acts as liquidity, concerns about inflation cannot be ruled out."