Ominous ‘twin deficits’

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Ominous ‘twin deficits’

 Korea is facing the unfamiliar concept of “twin deficits.” Fiscal deficit has widened under the Moon Jae-in government due to a record-sized spending streak. At the same time, the country is grappling with a trade deficit amid a spike in the cost of imports of fuel and commodities. Trade accounted for a $4.89 billion deficit in January, the second straight red month after December. The last time the exporting powerhouse registered a trade deficit for two straight months was in the wake of the 2008 global financial crisis.

Twin deficits, which the United States has suffered from since the 1980s, poses danger to the economy. Unlike the United States, Korea lacks international currency and natural resources. A trade-reliant open economy like Korea cannot afford a current-account deficit. When trade deficit was neglected in 1997, the country neared a default crisis and had to seek an international bailout. But at the time, Korea still had a strong fiscal account. The debt ratio versus the GDP stopped at 11.4 percent. The ratio exceeded 50 percent this year.

The consolidated budget balance has slipped into the red from 2019. The deficit has widened to 100 trillion won ($83 billion) last year. The consolidated account includes the statements of society security such as the National Pension Fund (NPS). The NPS currently has more income than expenditure. Fiscal state must get worse if consolidated deficit is so big even when counting the profit-making institutions. The government has recently been issuing nearly 100 trillion won ($83 billion) in new debt annually.

Still, political circles are carefree. Presidential candidates of rivalling parties demand an increase in the supplementary budget of 14 trillion won on top of this year’s record-sized budget of 608 trillion won. Hong Nam-ki, deputy prime minister for economic affairs and finance minister, is resisting a greater increase. But Lee Jae-myung, presidential candidate of the ruling Democratic Party (DP), is accusing Hong of abusing power. Yoon Suk-yeol, candidate from the main opposition People Power Party (PPP), also criticized Hong for solely opposing a bigger budget increase.

But the candidates must become aware of the dangerous warning from twin deficits. Energy prices are surging due to a glitch in global supply chains and the Ukraine crisis. The U.S. dollar has been strengthening due to the faster monetary tightening campaign in the United States. Consumer prices will continue to rise and trade account could keep up an alarming deficit streak. Instead of opting for a spending spree, the country must prepare emergency actions to revive the economy.
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