[Exclusive] Tax-Draining ‘Minus Account’ Public Fund... Spending 18 Trillion on Interest Repayment

Ministry of Economy and Finance Budget Increases 21% to 32 Trillion Despite Sound Fiscal Management
18.2 Trillion Allocated for Public Fund Deposit Interest
Though Appearing as Surplus Funds, Using Public Funds Raises Interest
Budget Also Includes Issuance of Fiscal Bonds and Interest Repayment on Bank of Korea Loans
"Not a Desirable Direction, Requires Parliamentary Review"

The Ministry of Economy and Finance has increased its budget for next year by more than 21% to cover a shortfall in tax revenue. This is due to interest repayments on the use of the Public Fund Management Fund (Gongja Fund) and the issuance of treasury bonds to fill the national treasury. The budget also includes funds for interest repayments on money borrowed from the Bank of Korea. Amid severe restructuring, so-called a "tight budget," which led to cuts in several ministries' budgets, experts point out that the urgent task is to increase economic growth rates to boost tax revenue and break the vicious cycle of economic downturn → tax shortfall → national bond issuance (fund borrowing) → rising interest.

According to the government on the 4th, the Ministry of Economy and Finance's budget for 2024 is KRW 32.5451 trillion based on the general account, an increase of KRW 5.6922 trillion (21.2%) from this year's budget of KRW 26.8529 trillion. Considering that the total budget for next year increased by 2.8% to KRW 656.9 trillion, this is about eight times higher growth. The item with the largest budget increase is the "inter-account fund transaction" to pay deposit interest on the Gongja Fund. This item rose by KRW 3.7815 trillion (26.1%) from KRW 14.4843 trillion last year to KRW 18.2658 trillion.

Pulling Gongja Fund Due to Tax Shortfall, Interest Repayment Budget Alone at KRW 18 Trillion

The Gongja Fund is a fund pooled from various funds. It is mainly used for injection into other funds with poor fiscal conditions or for issuing and repaying national bonds. The Ministry of Economy and Finance manages it, effectively acting as a fund of funds, hence it is called the "reservoir of public funds."

Although it may seem like surplus funds, since it is borrowed from other funds, a cost must be paid. Borrowed funds are typically used for one year and then repaid with interest at a pre-agreed rate. The more the Gongja Fund is used, the higher the interest payments. According to a Ministry of Economy and Finance official, considering not only the interest on deposits but also the total accumulated interest repayment of the Gongja Fund to date, more than KRW 22 trillion will be spent next year alone.

The tens of trillions of won spent on interest repayment of the Gongja Fund is due to the significant increase in the Gongja Fund since the inauguration of the Yoon Seok-yeol administration. The Ministry of Economy and Finance's planned Gongja Fund for next year is KRW 322.8 trillion, the highest ever. This is an increase of KRW 38.1 trillion (13.3%) from this year's KRW 284.7 trillion. During the budget review process, the Ministry proposed increasing the Gongja Fund in departments with relatively comfortable fund conditions. Some departments demanded more than double the Gongja Fund compared to the original plan.

The background for the Ministry of Economy and Finance's expansion of the Gongja Fund is the tax shortfall. From January to July this year, national tax revenue was KRW 217.6 trillion, KRW 43.4 trillion less than the same period last year. Even if the remaining five months, which had favorable revenue conditions, collect taxes as last year, this year's tax revenue will fall short of the forecast (KRW 400.5 trillion) by KRW 48 trillion. There is even a forecast that if revenue conditions do not improve or worsen, this year's tax shortfall could reach KRW 60 trillion.

"Not a Desirable Direction, Needs Parliamentary Review"

The Ministry of Economy and Finance plans to use unused budgets, global surpluses, and surplus funds without preparing a supplementary budget. It is reported that they plan to use unused budgets and global surpluses first, and then cover the remaining amount of around KRW 10 to 20 trillion with the Gongja Fund. Ultimately, to cover the tax shortfall, the Gongja Fund was increased, and as interest burdens rose, related budgets increased significantly despite a sound fiscal stance.

A separate budget was also prepared for interest repayment on temporary borrowings from the national treasury management perspective. The budget size is KRW 349.2 billion, which was zero last year. These funds are used when issuing treasury bonds to cover temporarily insufficient funds in the national treasury and to pay interest on money borrowed from the Bank of Korea. In particular, the government borrowed KRW 100.8 trillion from the Bank of Korea from January to July this year. This is three times the total temporary borrowing of KRW 34.2 trillion last year.

A Ministry of Economy and Finance official explained, "It is not that pure business expenditures increased, but there were funds that the Ministry had to bear while managing accounts and transactions between accounts," adding, "Amounts for the Economic Development Cooperation Fund (EDCF) and Official Development Assistance (ODA) also increased slightly."

Professor Sung Tae-yoon of Yonsei University's Department of Economics said, "This situation started with a tax shortfall and is related to the external economic environment," adding, "It is hard to say that borrowing other funds and borrowing money from the Bank of Korea due to insufficient tax revenue is wrong, but it is not a desirable direction." He further stated, "Ultimately, it should be subject to review by the National Assembly."