The government on Friday approved the 14 trillion won supplementary budget bill through a Cabinet meeting, a 10th supplementary budget under the current government. It is also a supplementary budget approved ahead of an election for three years in a row. Even though the government has decided to issue 11.3 trillion won worth of treasury bonds to finance the budget, the ruling and opposition parties are competitively demanding an additional increase as if they are upping the ante in poker. There is a high chance that the scale of the extra budget will increase significantly when it passes the National Assembly in mid-February.
The key to the government’s supplementary budget is to distribute 3 million won in COVID-19 subsidies to 3.2 million won small business owners and the self-employed, including those in the travel and accommodations businesses, hit by the pandemic. Although the government collected more tax than expected last year, it ended up issuing bonds as it cannot use the money until the April tax settlement. As a result, the country ran a consolidated deficit of 68.1 trillion won this year, with the accumulated national debt rising to 1075.7 trillion won. The national debt-to-GDP ratio also exceeded the 50% mark for the first time.
The ruling DP immediately announced an increase in the extra budget. DP presidential candidate Lee Jae-myung Friday proposed a meeting between all presidential candidates to discuss increasing the extra budget to 35 trillion won to support those hit by the pandemic. The main opposition People Power Party (PPP) presidential candidate Yoon Suk-yeol previously said the country needs up to 50 trillion won to provide sufficient support to the people depending on the severity of their damage, raising the possibility of an agreement. The ruling and opposition parties are making a bad precedent of drawing up a supplementary budget in January, when the ink has not even dried in the New Year’s budget plan.
The side effects of the rivalry between the ruling and opposition parties ahead of the election are already showing. An increase in deficit-financing bond issuance is leading to a rise in the interest rate of government bonds, pushing up market interest rates. Coupled with expectations that the Bank of Korea and the Fed will soon raise their key interest rates, the interest burden on the self-employed and households are rapidly expanding. Even if those hit by the pandemic receive more subsidies, the interest burden on them is growing bigger and faster. As the burden of mortgage interest rates grow, the property market is seeing more monthly rent transactions and less jeonse transactions. An increase in government spending pushes up consumer prices, putting a strain on ordinary people.
Moreover, nearly half of the 60 trillion won in excess tax revenue last year, which triggered the demand for an additional budget by politicians, was a temporary increase in real estate taxes caused by soaring house prices, transfer income tax and comprehensive real estate holding tax. As the country is experiencing the so-called housing “transaction cliff” this year, the government’s fiscal conditions are showing signs of worsening due to a sharp drop in related tax revenues. If both the ruling and opposition parties have the conscience left to make a rational judgment, they should refrain from making excessive increases in the extra budget during the deliberation process at the National Assembly, and show some sincerity to reduce the burden on future generations by reducing unnecessary budget expenditure.