Bring the fiscal deficit under control fast

As a shortage of tax revenue is expected to be 59 trillion won ($44 billion) this year beyond the estimated target, the fiscal deficit may top 80 trillion won for 2023. The red means that the government has more to spend than what it earns. Although there may be some changes in the remaining months of the year, Korea may be unable to meet the target for containing fiscal deficit under 3 percent of the GDP in the next four years, particularly given the deficit of 68 trillion won — already equivalent to 3 percent of the GDP as of July.

The problem is that such a fiscal deficit cannot meet the fiscal rule pushed by the Yoon Suk Yeol administration to mandate the deficit under 3 percent of GDP in the National Finance Act. The conservative government has vowed to keep to the rule and arrange the budget within the framework regardless of the legalization repeatedly blocked by strong oppositions from the Democratic Party.

During a public finance strategy meeting in July, Yoon pledged to shift fiscal policy toward a balance after a loose one which ended up stretching government debt by 400 trillion won under the liberal Moon Jae-in administration. “Fiscal tightening is unpopular, and no political power prefers to adhere to fiscal integrity. But tightening is necessary for the future of the nation and people,” he said. But he may not be able to keep that promise.

Last month, the government proposed a budgetary outline for next year that would increase 2.8 percent from 2023, the smallest growth since 2005. Although the rise is sharply lower than the average gain of 8.7 percent under the five-year Moon presidency, expenditures for 2024 nevertheless exceed the estimated revenue by a whopping 92 trillion won. If this deficit continues, Korea exceed the 3-percent threshold against GDP for five consecutive years.

The Yoon administration hopes to see the passage of the fiscal guidelines to be effective from 2025 during the plenary session of the National Assembly this year. It is discussing with the legislature to include the mandate to use 100 percent of the surplus tax revenue to pay off debt in the following year when the government violates the limit in spending due to extraordinary conditions. Even if the fiscal rule passes the National Assembly, the government would still be breaking the ceiling if fiscal deficit continues to grow each year.

The increase in fiscal deficit owed much to the worsening balance sheets of large companies and households under the high-interest-rate environment. Public finance is the last resort of the Korean economy. The government has the duty to uphold the fiscal integrity regardless of the challenges at home and abroad.