Public Debt in Korea

Korea - Public Debt

Government announces expansionary 2021 budget to bolster recovery

On 1 September, the government presented its 2021 budget, which aims to promote economic recovery from the damage caused by the pandemic. It will provide continuity to the expansionary stance of the 2020 budget, which has already had three approved additions, with a fourth one proposed on 10 September and currently waiting parliamentary approval.

The colossal KRW 555.8 trillion (USD 473.8 billion) planned expenditure for 2021 is set to bolster domestic activity, providing support for both fixed investment and private consumption, as the government plans to spend KRW 8.6 trillion on job retention and creation, and KRW 65.9 trillion to promote private sector investment in the form of loans and guarantees.The ramping up of investment, within the framework of the “New Deal”, is aimed at increasing productivity in the longer term. Health, welfare and employment expenses are set to increase 10.7% (KRW 19.4 trillion), which is the budget category with the biggest expansion. Moreover, public administration and local governments will see a 9.5% increase (KRW 7.5 trillion), while a significant expansion of 22.9% (KRW 5.4 trillion) is planned for industry, SMEs and energy. Notably, national defense expenses will rise 5.5% (KRW 2.8 trillion). In contrast, however, education will suffer a 2.2% budget cut (KRW 1.6 trillion). To finance the expenses, the government has penciled in a revenue increase of 2.6% (KRW 12.3 trillion) to KRW 483 trillion.

Despite the significant expenditure announced, Robert Carnell, head of research for the Asia-Pacific region at ING, commented:

“The main complaint in our recent report was that we felt, in many cases, the spending amounts were a bit token, and far more would be required quickly to make a real difference. […] But it is still better than most of the countries in the region.”

The Korean Ministry of Economy and Finance now expects a fiscal deficit of 5.4% in 2021, a small improvement on the figure projected in the supplementary budget applied last month, reducing the deficit by KRW 1.8 trillion. However, FocusEconomics panelists currently predict a much smaller shortfall, forecasting 2021’s deficit at 3.5%.

Our panel sees the economy contracting 0.9% in 2020, which is down 0.1 percentage points from last month’s forecast, before growing 3.2% in 2021, which is up 0.1 percentage points from the previous month’s forecast.