[Graphics by Song Ji-yoon]
South Korea’s fiscal deficit has more than tripled over the past year after the government stretched the budget four times this year to sustain the economy from prolonged battle with pandemic crisis.
According to a report released by the Ministry of Economy and Finance, Korea’s consolidated fiscal deficit – total income minus spending – reached 70.9 trillion won ($61.7 billion) by August, more than tripling from 22.3 trillion won in the same period last year.
Operational fiscal deficit – which is consolidated budget balance minus social security funds like pension and employment insurance – also doubled from 49.5 trillion won last year to 96 trillion won this year.
The sharp widening of the government’s fiscal deficit comes after the government increased fiscal spending to support businesses suffering from Covid-19 impact while overall environment to secure tax revenue has deteriorated.
Fiscal spending in the January-August period surged 39.8 trillion won year over year to 388.7 trillion won while total income fell 8.8 trillion won to 317.8 trillion won during the same period.
Tax revenue in the first eight months of this year stopped at 192.5 trillion won, 17 trillion won less than the same period last year. Tax collection rate was 68.8 percent based on the third extra budget, which is 2.6 percentage points lower than last year.
Corporate tax revenue was 14.6 trillion won smaller and VAT 4 trillion won less this year. On top of reduced income, the government deferred tax dues worth 7.5 trillion won to relieve businesses from the hardship from virus spread.
Government debt as result hit 794.1 trillion won as of end of August, up nearly 100 trillion won from 699 trillion won a year ago. The debt figure and growth speed were both largest-ever.
The government’s increased spending and reduced income is raising an alarm over growing national debt. It also questions efficacy of non-binding fiscal rules the government announced recently to introduce from 2025.
The finance ministry recently announced to introduce new fiscal rules to prevent deficit spending by managing government debt to stay under 60 percent of gross domestic product (GDP) or consolidated fiscal deficit to not exceed 3 percent of GDP from 2025. Under the plan, the government is deemed as having satisfied fiscal rule if it meets one of the two set requirements.
The government’s consolidated fiscal deficit ratio however already hit 3.7 percent of 2019 GDP by August.
The government allowed deficit ratio to reach up to 4 percent by allowing 1 percentage point upon slowdown in the economy and also an exemption upon outbreaks of large-scale disaster, war, or global economic crisis.
While planning this year’s fourth extra budget, the finance ministry projected national debt to reach 846.9 trillion won this year – 43.9 percent of GDP. In the first 8 months of this year, national debt ballooned 100 trillion won from the same period a year ago. The debt ratio versus GDP would go higher if the economy cannot grow more than 1 percent.
The Budget Office of the National Assembly also projected in a recent report that national debt ratio would reach 44.5 percent of GDP in 2020, 103.9 percent in 2040, 158.7 percent in 2060, and 187.5 percent in 2070 under current environment.
The Korea Economic Research Institute in Tuesday study warned that South Korea’s sovereign credit rating could be downgraded by two notches if debt-to-GDP ratio hits 99.6 percent.
By Yang Yeon-ho and Lee Eun-joo
[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]