The Ministry of Strategy and Finance announced on August 30 that the fiscal account deficit amounted to 46.2 trillion won (US$41.9 billion) in the first half of this year, which is much more severe than during the financial crisis in 2008. Although a fiscal deficit is not an entirely bad thing, the amount is too high. The surge can be attributed to the current economic recession, which has resulted in a low tax yield and the fiscal spending that has skyrocketed for welfare expenditure.
The size of the half-year deficit is almost equal to the one-year amount of corporate tax income. This means that Korea cannot avoid a large amount of red ink, no matter how frugal it remains during the rest of this year. The government estimated this year’s fiscal deficit at 23 trillion won (US$20 billion) back in May, when it came up with a revised supplementary budget of 17 trillion won (US$15.5 billion). At that time, it predicted that the economic growth rate would be close to 4% and it would be able to collect taxes as planned. However, things are moving in the opposite direction now.
One of the greatest concerns is that the government could face a fiscal cliff at the end of this year as spending increases with the ceiling already fixed. Another revised supplementary budget is unlikely to be welcomed by the general public, either. In the end, it has no option but to slow down the execution of public finance, but this leads to economic contraction. In short, it is between a rock and a hard place now.
There are more problems. If it lays its hands on the budget reserves amounting to five to six trillion won a year to dodge the fiscal cliff, it will have no resources available for next year. If the national economy fails to recover next year, it has to resort to early fiscal execution in the first half of 2014 and another revised supplementary budget during the latter half to repeat the vicious cycle. This is the very reason why the Korean government has recorded fiscal deficits for six years in a row since 2008.
It is planning to bolster its fiscal soundness by means of the National Fiscal Management Plan for 2013 to 2017 that is going to be finalized soon. It would be well-advised to drastically reform the 135 trillion won (US$122 billion) plan to improve the national fiscal conditions.