Korea's national budget deficit is expected to exceed 100 trillion won this year. It is the third time in a row that the deficit has come to the 100 trillion level, following 112 trillion won in 2020, and 90.6 trillion won in 2001 when Covid-19 broke out. Economic institutions such as the International Monetary Fund (IMF) and global credit rating agencies that determine national credit ratings are already sounding warnings about Korea's soaring fiscal deficit.
This year will be the 15th consecutive year that Korea has experienced a deficit of over 100 trillion won since the global financial crisis. The deficit, which was 54.4 trillion won in 2019, more than doubled in 2020 and continues to hover around 100 trillion won. This was heavily affected by the policies under the former and current administrations that spend the budget wildly generously to respond to the pandemic or fulfill their presidential campaign pledges. All the spending came around as national debt, owed by the central and municipal governments, which is up by 408.6 trillion won, from 660.2 trillion won five years ago to 1,068.8 trillion won at the end of this year, while the deficit-to-GDP ratio rose from 36% to 49.7% is projected to increase.
Two years ago, the former Moon Jae-in administration submitted a plan to introduce fiscal rules fitting to Korea’s circumstances to the National Assembly in response to growing concerns from domestic and international societies about the country’s snowballing fiscal deficits. However, the rules were only in name - unlike other advanced countries that established rules by constitution and law, Korea chose to regulate the rules with enforcement decree. It targeted the integrated fiscal balance, still in positive status, for management starting from 2025. The plan did not even pass the national assembly and was scrapped.
Last September, the Yoon Suk Yeol administration submitted a bill to the National Assembly to amend a law to manage the annual managed fiscal deficit within 3% of GDP. However, the ruling and the opposition parties have been in a tug-of-war arguing the budget is for “Yoon’s budget” or “Lee Jae-myung budget” and do not pay attention. The bill is about to be discarded without so much discussion. The lawmakers from both parties are indifferent to reducing the national debt but are trying to figure out how to secure their constituency budget until the last minute of the budget plan season.
The nation overcame the previous Asian and global financial crises by forming a solid fiscal foundation. Now Korea is facing an unprecedented complex global crisis with a severely dented treasury. Unless it enforces binding fiscal rules this year, the hardships the country will experience will be even more difficult, especially when the global economic downturn accelerates. The 100 trillion won of accumulated annual debts of a country cannot be left untouched. It is time to commence the bipartisan discussion to adopt the rules immediately.