South Korea’s budget deficit reached the highest levels in the first half of the year. The Ministry of Economy and Finance said that the government revenue decreased by 20 trillion won while its spending increased by 31 trillion won compared to last year, recording a 90 trillion-won deficit in the consolidated fiscal balance. The net fiscal balance, which does not take revenues from four major social security funds into account to provide a more accurate picture of the government’s finances, recorded a deficit of 110.5 trillion won. Both are the highest levels since the figures started being recorded in 2011.
The main reason for the increase in the deficit is that the government received less due to a sluggish economy while it spent more money to deal with the COVID-19 outbreak. The deficit recorded in the first half takes up 99 percent of 111.5 trillion won, an estimated deficit for 2020. The unusually long rainy season on top of the worst pandemic required more spending from the government, presenting challenges for the government in managing its budget.
The government, the presidential office and the ruling party agreed on Wednesday to double flooding relief and decide whether or not to draw up the fourth supplementary budget later. Days of torrential rain have recently caused damage across the nation, but local governments’ budgets for disaster relief and recovery have already been depleted because they were used to offer COVID-19 grants. Local governments are now turning to the central government, which has also little room for maneuver after three supplementary budgets.
The government should provide relief and help revitalize the economy when a country suffers an unprecedented disaster. However, it has to make sure to create a virtuous cycle where its spending helps the nation overcome a crisis, which increases tax revenues in turn. The government is savoring the fact that South Korea’s GDP forecast has been revised upwards to -0.8 percent from -1.2 percent in June, the smallest hit to growth of OECD countries.
Meanwhile, the debt-to-GDP ratio is expected to rise to the highest levels at 45 percent at the end of the year, three years ahead of the government plan. At this rate, the government might not have resources when they need them. Experts expect the pandemic will continue until next year, while South Korea’s growth potential is plummeting due to the aging population. It is not the right time to celebrate outperforming other nations but to tighten their belt with strong determination.