ⓒ YONHAP News

On March 2, the Korean government proposed an extra budget worth 15 trillion won to finance another round of emergency relief aid for those affected by the COVID-19 pandemic. The extra budget is the third-largest ever. Combined with the previously earmarked 4.5 trillion won, the new aid package totals 19.5 trillion won. The government plans to provide the funds to groups reeling from the pandemic, including small businesses and the self-employed, from the end of March. 

The supplementary budget, which is the fifth of its kind since the COVID-19 outbreak in 2020, raises concerns over mounting national debt. If new waves of the pandemic grip the country to prompt the government to draw up another extra budget, Korea’s national debt might surpass 1,000 trillion won this year. Here is researcher Oh Joon-beom at the Hyundai Research Institute with more. 

I think the size and direction of the new relief package have been set at an appropriate level. The latest package is the largest among the four rounds of such relief handout programs. 

It is expected to help ease the extent of economic shocks from tough social restriction measures, including assembly bans and reduced business hours, aimed at preventing further spread of the virus. This package does not provide universal support to all people but focuses on struggling small businesses and those vulnerable to job loss. On another positive note, part of the funds will be used for quarantine measures and vaccine purchases. 

Under the plan, the scope of beneficiaries and the amount of aid have been expanded. Recipients include those who were left out of the previous programs, such as street vendors and university students whose parents have lost jobs. The number of beneficiaries will stand at 6.9 million, which is 2 million more than those who received the previous round of handouts. Each recipient will be given up to 5 million won, up from the previous 3 million won. Also, redundant support will be allowed for those operating multiple stores. Researcher Oh explains how the extra budget has been allocated. 

Of the extra budget, 2.8 trillion won has been set aside for employment measures. 2.1 trillion won or 75 percent will be injected into job creation, with 275-thousand jobs offered to young adults, women and middle-aged people. Support will also be provided to ten industries in management crisis, including travel and performance industries. 

Meanwhile, 4.1 trillion won out of the extra budget has been earmarked for anti-virus efforts. 2.7 trillion won or 65 percent will be spent in purchasing and administering vaccines to ensure the stable provision of vaccines to inoculate 79 million people. Compensation will also be made for medical institutions that have suffered financial losses due to the pandemic. 

The supplementary budget will add 9.9 trillion won to Korea’s national debt, which is expected to reach 965.9 trillion won this year. The national debt-to-GDP ratio will also rise to 48.2 percent from 47.3 percent. 

Last year, international credit rating agency Fitch Ratings warned that it could lower South Korea’s credit rating if the country’s debt-to-GDP ratio rose to 46 percent. The ratio is one of the variables to determine a country’s credit rating. 

Korea’s debt-to-GDP ratio is still lower than that of the U.S. and Japan. But the problem is that the debt is growing at a fast pace, increasing more than 200 trillion won in just two years. The rapid deterioration of fiscal soundness is feared to affect the economy negatively. During the 2008 global financial crisis, some countries saw their national debt soar and their credit ratings were downgraded by several notches. While Korea’s debt-to-GDP ratio is considered stable, compared to other countries, the growth pace of debt is alarming and the situation might worsen further in the future. We cannot rule out the possibility that Korea’s credit rating might be cut down. If that happens, foreign funds may flow out of the country. Korea finds it increasingly difficult to collect more taxes due to the low birthrate and the rapidly aging population. In this situation, a heavier burden on government’s finances will dampen investment that should be made in areas to boost productivity. 

Another disturbing part is that loan rates at commercial banks will go up in line with the issuance of government bonds for the extra budget. Higher lending rates will place a burden on both companies and households. The 10-year government bond rate stood at 1.28 percent in July last year but it rose to 1.97 percent in late February. The interest rate on a five-year government bond also rose sharply to 1.45 percent from 1.03 percent. As a result, the interest rate on a government-provided mortgage loan, whose rate changes in accordance with the five-year bond rate, has also jumped. 

There is still a long way to go before the end of the pandemic. The government will inevitably have to increase its expenditure and issue state bonds again. As the nation’s fiscal situation is getting worse, some have begun to mention the need for a tax increase. 

With the debt-to-GDP ratio nearing 50 percent, a debate over fiscal health will continue. The latest extra budget is considered to be an inevitable measure to cushion the economic blow from the pandemic, but it seems necessary to discuss a fiscal policy for the post-pandemic era. The government does not consider a tax increase for now. Analysts have mixed views on the method and pace of a tax hike. Some say it’s necessary to raise indirect taxes such as the value added tax, while others argue that the government should raise income and property taxes for better distribution of wealth. 

Korea is not the only country that faces depleted state coffers in the pandemic situation. Governments in some countries are considering raising taxes to reduce their debt. The U.K., for example, has decided to increase the main rate of corporate tax up to 25 percent in 2023 from the current 19 percent. It is the country’s first corporate tax rise in 47 years. The move certainly merits attention, as the ruling Conservative Party has traditionally advocated a tax cut. Also in the U.S., some have proposed a 3 percent annual tax on wealth exceeding 1 billion dollars. 

Governments that released a huge amount of money to overcome the COVID-19 crisis are now seeking to collect money back from the public. 

Considering the serious economic difficulties triggered by the pandemic, expansionary fiscal policies will be unavoidable for the time being. But the distribution of vaccines is raising hopes for economic recovery, and we need to discuss how to manage finances in the post-pandemic era, as I said before. It’s necessary to execute fiscal policy measures more efficiently to prevent the budget from being wasted. Based on social consensus, the government will have to come up with proper tax policies that would ensure public welfare, in consideration of the impact of the aging population and the low birthrate.

In times of crisis, the government’s task is to minimize damage on the people and keep the economy going. The Korean government should also listen to experts who point out that national debt is increasing too fast. The government and relevant agencies should take responsible steps to increase transparency and efficiency in budget execution and manage state finances at an appropriate level.