The Ministry of Economy and Finance announced Thursday that the deficit of South Korea’s consolidated fiscal balance, a barometer to the country’s financial condition, swelled by 22 trillion won to 102 trillion won year-on-year. Merely three months earlier, the Finance Ministry projected the deficit will run around 110.8 trillion won over the year, yet it took only about half a year to reach the mark of 100 trillion won. While fiscal earnings rose by 36 trillion won on the back of an increase in corporate taxes and income taxes in the first half of the year, fiscal spending surged by a whopping 64 trillion won.
The massive fiscal hemorrhage is mainly attributable to the second revised supplementary budget worth 62 trillion won in late May. Back then, the finance ministry pressed ahead with the biggest amount of supplementary budget planning in history ‘on tick’ by adjusting the projections for tax revenues for the year by more than 50 trillion won. Thirty two trillion out of the 38 trillion won working expenses from the revised supplementary budget was executed between late May and June. The rapid increase of tax spending against tax revenues is putting the country’s annual fiscal deficits permanently above the 100 trillion won mark.
Agitated, the government is stressing fiscal stability. President Yoon Suk-yeol emphasized the importance of fiscal soundness in his celebratory speech on the Liberation Day, and Deputy Prime Minister Choo Gyeong-ho proposed a plan to legislate a set of fiscal rules to limit the share of deficits in consolidated fiscal balance to 2 percent in the event of debt surge. But it is hard to understand why the government has set this year’s aggregate spending – with two revised supplementary budgets - as a standard if it truly intends to cut the amount of spending next year. Typically, fiscal planning is anchored to the principal budget, from which it can be considered either as expansionary or contractionary. It takes a reliable reference point for effective fiscal austerity.
Fiscal soundness is not an option; it is one of the long-standing principles that must be followed for national governance. The International Monetary Fund projects that South Korea’s fiscal debt ratio will exceed 100 percent by 2050. Moody’s is also expressing concerns about Korea’s fiscal freefall. What is worse, a fiscal loosening under the severity of inflation will only trigger the surge of prices further, falling into the trap of a vicious circle. The Korean government must cut the number of projects and minimize new initiative through bold structural spending reforms. It takes an action not a chant to curb fiscal deficits.