Huge Fiscal Deficit
The Korean government recorded a budget deficit of 17.5 trillion won (US$17.1 billion) in the first quarter of this year. Under the circumstances, concerns are rising over a huge fiscal deficit with adverse conditions expected for the current quarter as well. The deficit had amounted to 15.6 trillion won (US$15.2 billion) in 2013.
The Ministry of Strategy and Finance announced on May 20 that quarterly tax income stood at 84.1 trillion won (US$82.0 billion) between January and March, while gross expenditures reached 101.6 trillion won (US$99.1 billion). The deficit increased by approximately three trillion won year-on-year from 14.8 trillion won (US$14.4 billion).
The yearly Q1 deficit had been 12.3 trillion won (US$12.0 billion) in 2012, but increased by 20.3 percent last year, and the rate of increase reached 18.2 percent this year. Fortunately though, the tax income rose from 47.1 trillion won (US$45.9 billion) to 48.8 trillion won (US$47.6 billion) at this time to make up for at least some of the deficit.
Still, fiscal conditions are likely to get worse in the second quarter of 2014, because the shrinkage in domestic demand stoked by the Sewol ferry disaster is leading to a drop in value-added tax revenue. At the same time, the government is planning to raise its ratio of financial execution for the first half from 55 percent to 57 percent to cope with the catastrophe. In this case, 7.8 trillion won (US$7.6 billion) of additional budget is executed in May and June, which could result in a greater Q2 budget deficit.
Another negative factor is the appreciation of the won as of late. The government had assumed an exchange rate of 1,120 won per U.S. dollar when setting up the budget plan earlier this year. However, the current rate is below 1,030 won per U.S. dollar. According to the government, tax income is cut by 1,400 won every time the foreign exchange rate falls by 10 won. The difference between the government’s estimate and the actual income is forecast to reach one trillion won (US$975 million) given global investment banks’ prediction that the rate would be at around 1,000 won per U.S. dollar this year.
In the meantime, the debt of the central government amounted to 474.9 trillion won (US$463.0 billion) as of the end of March, 10.9 trillion won (US$10.6 billion) higher when compared to the settlement date of last year. The sizes of the guarantee obligations and the national property were 30.5 trillion won (US$29.7 billion) and 914 trillion won (US$891 billion) (tentative) as of late April, respectively.