Concern Growing over Fiscal Soundness as Welfare Spending Keeps Growing

Concern is growing over the Korean government's worsening mid-term fiscal soundness. Tax revenue is on the decline due to a deepening economic slump, while government spending is growing in the welfare sector. The amount of national debt is expected to reach 1,061 trillion won (about US$914 billion) in 2023, up from 740 trillion won (about US$638 billion) in 2019, as revenues do not keep up with spending. While local governments have also jumped on the welfare spending bandwagon, controversy over populism in welfare policy is expected to intensify before the April general elections.

According to the Ministry of Strategy and Finance's 2019-2023 National Fiscal Management Plan, the government’s total expenditure will increase 6.5 percent per year during this period. Mandatory spending is expected to grow at an annual rate of 6.1 percent. Mandatory spending refers government spending on certain programs that are mandated by law, such as contributions to pension programs and the national health insurance system, social security spending, and interest payments. In particular, mandatory spending is expected to increase sharply in line with the growth in welfare spending mandated by law.

The national burden from securing basic livelihood security allowances will increase by an annual average of 6.4 percent from 12 trillion won (about US$10.8 billion) in 2019 to 16 trillion won (about US$ 13.9 billion) in 2023. Basic pensions stood at 11.5 trillion won or about US$9.9 billion in 2019 and will grow 10.4 percent annually on average from 2019 to 2023. Basic pensions pay a fixed amount of monthly allowances to the lower 70 percent of the elderly 65 years old or older. Discretionary expenditure which means remaining expenditure except for mandatory expenditure is expected to grow 6.9 percent annually on average.

The problem is that the growth of total expenditure eclipses the growth of fiscal revenue. In particular, nine percent expansionary finance has been continuing since the inauguration of the Moon Jae-in Administration. The percentage is higher than those of previous governments. The percentage is 9.5 percent in 2019 and will be 9.3 percent in 2020. The average increase in total expenditure (including extra budgets) was 6.8 percent for the Roh Moo-hyun Administration (2005-2007), 4.9 percent for the Lee Myung-bak Administration (2008-2012), and 4.8 percent for the Park Geun-hye administration (2013-2017).

During this period, the fiscal revenue including budgets and funds, are expected to grow at an average annual rate of 3.9 percent. This is 1.4 percentage points down from the 2018-2022 plan (5.2 percent). The annual fiscal revenue was 482 trillion won (about US$415 billion) in 2020, 505.6 trillion won in 2021, 529.2 trillion won (about US$456 billion) in 2022, and 554.5 trillion won (about US$478 billion) in 2023.

National tax revenue is expected to grow at an annual average of 3.4 percent. In particular, as corporate tax revenue plummeted due to a slump in the Korean semiconductor industry in 2019, experts predicted that in 2020, corporate tax revenue will amount to 292 trillion won (about US$252 billion), which is a drop of 2.8 trillion won (about US$2.4 billion) from 2019.

As fiscal expenditure increases, but imports fail to keep up with it, and the deficit of management finance increases from 37.6 trillion won (about US$251 billion) in 2019 to 90 trillion won (about US$78 billion) in 2023. The administrative fiscal balance is the government's actual fiscal status minus total expenditure after excluding social security funds such as national pensions and employment insurance that cannot be directly used for fiscal expenditure.

The combined fiscal management balance which includes the administrative fiscal balance and social security funds was a surplus of 6.5 trillion won (about US$5.6 billion) in 2019, but the deficit is expected to reach 49.60 trillion won (about US$43 billion) in 2023. In particular, the deficit of the consolidated fiscal balance (11.41 trillion won (about US$9.8 billion)) in January-October 2019 was the largest since the government began to compile such statistics in 2000.

The national debt will snowball too -- 740 trillion won (about US$639 billion) in 2019, 805.5 trillion won (about US$694 billion) in 2020, 887.6 trillion won (about US$765 billion) in 2021, and 970.6 trillion won (about US$836 billion) in 2022. In 2023, the national debt is expected to exceed 1,000 trillion won (about US$862 billion) by hitting 1,061.3 trillion won (about US$915 billion).

The national debt-to-GDP ratio is also expected to rise to 42.1 percent in 2022 and to 46.4 percent in 2023 from 37.1 percent in 2019.

The tax burden ratio is projected to inch down to 19.2 percent in 2020 from 19.6 percent in 2019 and then rise to 19.4 percent in 2023. The rate of burdens on taxpayers including social insurance premiums without tax revenue is expected to increase from 26.8 percent in 2019 to 27.4 percent in 2023.