By Yoon Ja-young
The government decided to set a supplementary budget to prop up the sagging economy, but concern is increasing that this will negatively affect its fiscal soundness.
Government debt is expected to surpass 580 trillion won this year, with the ratio to GDP nearing 37 percent.
Strategy and Finance Minister Choi Kyung-hwan said that the supplementary budget will deteriorate fiscal soundness for the time being. “However, if the economy fails to grow, it will aggravate fiscal soundness even further in the mid- to long-term. It is an inevitable measure,” he said, announcing the economic plan for the latter half of the year.
“For the mid- to long-term, the government will prevent deterioration of fiscal soundness through reform and the adoption of strict regulations,” the minister said.
He added that it would be inevitable to issue government bonds for the supplementary budget.
Previously, it could use surpluses from tax or the central bank as high economic growth enabled it to collect more revenue than estimated.
With the economic slowdown, however, the government has been suffering a tax shortfall and will have to resort to bonds.
The government says that the country’s fiscal health is still okay compared with other developed countries. Debt stood at 39.6 percent of GDP in 2013, far lower than the average 110.9 percent for Organization for Economic Cooperation and Development member countries. Even so, economists advise that it should be carefully managing fiscal health.
Lee Jun-hyup, a research fellow at Hyundai Research Institute, said the supplementary budget should be set only once this year, taking into account fiscal soundness.
“As it will be expanding short-term fiscal spending, the government should show its strong determination to protect long-term soundness.”
He said the government should correct and bolster its mid-term fiscal management policy at the same time.
“It should minimize the issuance of bonds to fund the supplementary budget. Using surpluses in diverse funds, cutting spending at government institutions or other unnecessary project expenses can be a solution.”
Lee also stressed that the government should be conservative in estimating tax income. “The tax shortfall is due to an overly optimistic government outlook on the economy. It should be rather conservative in economic or tax income outlooks.”
He said that if the tax shortfall becomes chronic, there will be a need for a supplementary budget each year, worsening the country’s fiscal health.
He also stressed that the government should focus on sustaining its tax sources.