SEJONG– South Korea said Thursday it plans to implement a belt-tightening policy in a shift from years of an expansionary fiscal policy stance in an effort to improve fiscal health impaired by the growing national debt.
President Yoon Suk-yeol’s government unveiled a five-year plan to manage state finances amid concerns that the country’s debt has grown at an alarming pace and high indebtedness could negatively affect its sovereign rating.
At a fiscal strategy meeting presided over by Yoon, the finance ministry said it plans to reduce the fiscal deficit to pre-pandemic levels. It aims to lower the fiscal deficit to a size equivalent to less than 3 percent of the gross domestic product (GDP), from the 5.1 percent estimate for this year.
The country also set the goal of cutting the debt-to-GDP ratio to around “the midpoint” of the 50 percent range by 2027 in a bid to slow the pace of the national debt. The debt ratio is likely to reach 49.7 percent this year.
The move marks a departure from the expansionary fiscal policy that the previous Moon Jae-in government had maintained over the past five years in a bid to prop up economic growth and cope with the fallout of the COVID-19 pandemic.
The former Moon government, which took office in May 2017, drew up record-breaking national budgets and created seven rounds of pandemic-related extra budgets. As a result, the country’s debt has risen at a fast pace and its fiscal deficit has sharply widened.
The national debt is expected to reach 1,068.8 trillion won (US$819 billion) this year, sharply up from 660 trillion won in 2017, according to the ministry’s estimate. Such debt will exceed the 1,000 trillion-won mark for the first time in 2022.
Global credit appraiser Fitch Ratings said in January that a continued rise in South Korea’s debt ratio could affect its sovereign rating over the medium term. The agency said Korea’s shift toward expansionary fiscal spending and tolerance of fiscal deficits appear to be becoming more “entrenched.”
Against this backdrop, the Yoon government plans to “overhaul” its expenditure structure and will seek to introduce a stricter and binding fiscal rule to bolster fiscal health.
The ministry plans to normalize COVID-19-related emergency spending to pre-pandemic levels and curtail nonessential expenditures.
In 2020, the former Moon government proposed a fiscal framework that would limit the country’s debt to 60 percent of its GDP or its fiscal deficit to 3 percent starting in 2025. The rule is still pending at the National Assembly.
The incumbent government plans to adopt a new fiscal rule that would reduce the fiscal deficit in a stricter manner and aims to advance the timing of its implementation.
The government plans to draw up next year’s national budget by taking into account austere measures.
The fiscal consolidation plan came as the South Korean economy faces a risk of stagflation, a mix of slowing growth and high inflation, due to heightened external economic uncertainty.
Asia’s fourth-largest economy is feared to lose steam as deteriorating external conditions will likely dent investment and export growth.
The country’s inflation ran at a near 24-year high in June due largely to surging fuel costs. High inflation erodes people’s purchasing power and dampens private spending, which in turn could hamper economic growth.
The Bank of Korea has raised the policy rate five times since August last year to tame inflation, with market players looking at the possibility of an unprecedented “big-step” hike of 50 basis points next week.
Some critics said the government’s shift to a belt-tightening mode could reduce its room to respond to the economic slowdown.
“The government’s economic policy is focused on supporting private sector-led economic growth,” Second Vice Finance Minister Choi Sang-dae told reporters Wednesday.
“It would be desirable for the government to reduce its contribution to the economic recovery a little bit while using more resources to enhance fiscal sustainability,” he added.
Last month, the finance ministry lowered its 2022 economic growth outlook to 2.6 percent, while sharply raising its inflation forecast to a 14-year high of 4.7 percent this year.
Source: Yonhap News Agency