S. Korea expands 2021 budget to account for economic impact of COVID-19 crisis

Posted on : 2020-09-02 18:22 KST Modified on : 2020-09-02 18:22 KST
Fiscal strategy focuses on economic recovery and bolstering Korean New Deal
Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki (center) announces the South Korean government’s 2021 budget at the Government Complex in Sejong on Aug. 27. (provided by the Ministry of Economy and Finance)
Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki (center) announces the South Korean government’s 2021 budget at the Government Complex in Sejong on Aug. 27. (provided by the Ministry of Economy and Finance)

The South Korean budget (total expenditures) for next year has been set at 555.8 trillion won (US$468.9 billion), an increase of 8.5% (43.5 trillion won, or US$36.7 billion) from this year’s main budget. For a second straight year, the government is opting for an expansionary fiscal strategy to support an economic recovery and support the Korean New Deal project.

The South Korean government finalized its 2021 budget plan and 2020-2024 national fiscal management plan at a Cabinet meeting presided over by President Moon Jae-in at the Blue House on Sept. 1. The budget is to be submitted to the National Assembly on Sept. 3. The government stressed that the 2021 budget was developed with an emphasis on expansionary fiscal management to support an economic recovery.

In a preliminary briefing on Aug. 27, Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki said the budget was a “reflection of the administration’s strong commitment to an economic recovery and was developed with a maximally expansionary focus within the scope of what we are capable of absorbing.” At the same time, the 2021 budget is only 1.6% larger than the 546.9 trillion won (US$461.3 billion) in total government expenditures this year, which have included three separate supplementary budgets.


Creating jobs while encouraging consumption in pursuit of Korean New Deal

The increased budget is to be used for maintaining and creating jobs to support an economic recovery, as well as encouragement of consumption and pursuit of the Korean New Deal. The largest portion consists of the budget for public health, social services, and employment at 199.9 trillion won (US$168.6 billion), representing an increase of 19.4 trillion won (US$16.4 billion, or 10.7%) from this year’s main budget. The larger budget is intended to strengthen both the social safety net, with a gradual abolition of the “obligatory support provider” standard for livelihood benefits and an increase in the basic pension, and the employment safety net, including support for employment insurance.

An additional 30.6 trillion won (US$25.8 billion) has been earmarked for jobs -- including implementation of a national employment support system, public sector job creation, and employment maintenance support funds -- representing an increase of 20%. But the overall rate of increase in the public health, social service, and employment budget is actually lower than this year’s 12.1%.

Two-digit rates of increase were also observed for budgets in the areas of industry (22.9%), the environment (16.7%), and R&D (12.3%) for the pursuit of the Digital New Deal and Green New Deal as key components of the Korean New Deal. A total of 7.8 trillion won (US$6.6 billion) was included for the Digital New Deal, which includes “data dam” (data that can be shared through 5G networks) construction and smart healthcare infrastructure, while 8 trillion won (US$6.7 billion) was included for the Green New Deal, which includes investments in new and renewable energy sources.

A further 1 trillion won (US$843.4 million) was designated as a “pump primer” to establish New Deal investment funds, including the “citizen participatory New Deal fund,” “Smart Korea fund,” and “future environment industry fund.” The government plans to maintain or create some 2 million jobs through the channeling of finances into the Korean New Deal and employment.

The administration’s decision to adopt an expansionary fiscal focus was based on its conclusion that large-scale fiscal outlays are inevitable to get the ball rolling on an economic recovery next year, with the 2020 growth rate predicted to register negative numbers amid signs of a resurgence in the country’s COVID-19 epidemic. Hong Nam-ki pledged to “revive the embers of an economic recovery through proactive fiscal management.”

Expansionary budget unavoidable in face of declining consumption, expert says

Commenting on this, Hanyang University economics professor Ha Joon-kyung said, “With private sector demand declining as a result of the coronavirus and other factors, this is in some sense inevitable as a strategy to preserve GDP by using finances to create demand and prevent the economy from contracting.”

While next year’s spending is increasing, revenues will remain more or less the same. Total revenues for 2021 amount to 483 trillion won (US$407.5 billion), an increase of 0.3% from the 481.8 trillion won (US$406.4 billion) in the main budget for 2020. Amid the economic downturn caused by the virus, next year’s national tax revenues have been projected at 282.8 trillion won (US$238.5 billion), down 3.1% (9.2 trillion won) from this year. Last year as well, national tax revenues for 2020 had been predicted to decline by 1.2%; the forecast for next year predicts an even larger drop. The difference between the rates of increase in total expenditures and total revenues is also increasing from 7.9 to 8.2 percentage points. While the rate of increase in total expenditures is dropping slightly from 9.1% to 8.5%, the rate of increase in total revenues is expected to fall by even more from 1.2% to 0.3%.

This means that a historically large issuance of 89.7 trillion won (US$75.6 billion) in deficit-financing bonds will be unavoidable. The operational fiscal balance deficit for next year will also total an estimated 109.7 trillion won (US$92.5 billion), or 5.4% of GDP. The ratio of government debt to GDP is predicted to rise by 3.2 percentage points from 43.5% this year (at the time of balancing) to 46.7%. Commenting on the matter of fiscal soundness, Hong Nam-ki said, “We concluded that it is better to play our fiscal part through increased expenditures, even if that means some worsening of government debt and the fiscal balance.”

Issues concerning fiscal soundness in the future

The problem is that the deterioration of fiscal soundness could continue going forward. According to the “2020-24 national fiscal management plan,” the operational fiscal balance deficit is predicted to increase sharply to -123.2 trillion won (US$-103.9 billion) in 2022, -128.2 trillion won (-US$108.1 billion) in 2023, and -127.5 trillion won (-US$107.5 billion) in 2024, eventually reaching 5.6% of GDP. The national fiscal management plan presented last year had predicted respective fiscal balances of -82 trillion won (-US$69.2 billion) and -90 trillion won (-US$75.9 billion) for 2022 and 2023, or 3-4% as a proportion of GDP. Government debt was predicted to pass the quadrillion mark at 1.07 quadrillion won (US$902.2 billion) in 2022 for a 50.9% ratio of debt to GDP; by 2024, it was expected to climb still further to 58.3% (1.327 quadrillion won, or US$1.1 trillion).

“Even if a worsening fiscal balance through next year is unavoidable due to the coronavirus, we need to initiate discussions on measures for fiscal soundness, including increased taxes,” urged Myongji University economics professor Woo Seok-jin.

But Hong said, “An increase in taxes was not taken into consideration at all when the budget for next year was being devised, and the main measures [for increasing tax revenues] will involve expenditure restructuring and a decrease in tax exemptions and cuts.”

By Lee Jeong-hun and Lee Kyung-mi, staff reporters

Please direct comments or questions to [english@hani.co.kr]

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