Record-high Supplementary Budget Prepared

Deputy Prime Minister Hong Nam-ki (second from the left) explains this year’s third supplementary budget proposal during a briefing on May 29.

The South Korean government announced a supplementary budget of 35.3 trillion won on June 3, increasing this year’s total supplementary budget to 59.2 trillion won. Over 58 percent of the amount will be prepared from deficit-financing government bonds and the issuance is estimated to top 110 trillion won this year.

In the third supplementary budget, five trillion won will be spent for companies and jobs at risk, 3.1 trillion won will go to key industries via the government’s bond market stabilization fund and special purpose vehicle for corporate bond purchase and 5.1 trillion won will be spent on its digital and green new deal projects.

Deficit-financing government bonds will constitute 58.3 percent of the three supplementary budgets. South Korea’s total debt is likely to reach 840.2 trillion won and its debt-to-GDP ratio is estimated to increase to 43.5 percent as a result. The government’s annual deficit-financing bond issuance is likely to exceed 100 trillion won for the first time in history. The amount was 34.3 trillion won in 2019. The government’s annual fiscal deficit excluding social security funds is predicted to soar from 37.6 trillion won to 112.2 trillion won.

Then, the ratio of the fiscal deficit to the GDP will go up from 1.9 percent to 5.8 percent, the highest since 1998. Likewise, the sovereign debt will increase from 740.8 trillion won to 840.2 trillion won and the sovereign debt-to-GDP ratio will jump from 37.1 percent to 43.5 percent to significantly exceed the pre-supplementary budget target of 39.8 percent. The fiscal authorities have tried for a while to keep the fiscal deficit-to-GDP and sovereign debt-to-GDP ratios below 40 percent and 3 percent, respectively.

A controversial issue is that spending directly related to more corporate investment stands at just 43 billion won in the third supplementary budget. In other words, the government’s 250 trillion won emergency financial assistance based on the 59.2 trillion won supplementary budgets is focusing on consumption promotion, employment stabilization, welfare, etc. Besides, the government has cut the national defense budget by approximately two trillion won to prepare the supplementary budgets.

In the meantime, the Bank of Korea’s potential market intervention is drawing much attention in relation to the deficit-financing government bond issuance. The central bank’s government bond purchase is likely to exceed 10 trillion won this year with government bond issuance predicted to more than double due to the massive supplementary budgets.As a result of the third supplementary budget, this year’s net government bond increase amounts to 108.5 trillion won, including 97.6 trillion won of deficit-financing bonds. For reference, the net increase was 44.5 trillion won and the sum of deficit-financing bonds was 34.3 trillion won in 2019.