Korea will spend heavily for 2022, raising the debt-to-GDP ratio above 50%

Korea will spend heavily for 2022, raising the debt-to-GDP ratio above 50%

The South Korean government on August 31 announced a drastic increase in spending in the final annual budget plan of President Moon Jae-in’s five-year term.

South Korea’s debt-to-GDP ratio has increased from about 40% when President Moon Jae-in’s administration took office in 2017. Photo: AFP

Accordingly, South Korea is expected to spend a record 604.4 trillion won ($518.4 billion) next year, up 8.3% from this year’s budget plan, before two additional expenditures. Emergency was established to help households during the epidemic.

According to CNBC, with this strong spending level, Korea has pushed back all prospects of achieving the target balance budget while the fiscal deficit is widening. At the same time, the spending plan will push South Korea’s debt-to-gross domestic product (GDP) ratio to 50.2%, the highest on record.

“Our debt levels will exceed 50% (of the economy’s GDP) in the medium term, but as we begin to turn the fiscal situation around for the better, we expect the fiscal balance of payments to improve. significantly next year,” said a budget official at the finance ministry.

By 2025, Korea’s debt-to-GDP ratio will increase to 58.8%, according to estimates by the Ministry of Finance.

Covid-19 has forced the South Korean government to compromise its financial goals, setting out ambitious pandemic relief packages in six additional fiscal spending plans since the beginning of last year. The country’s debt-to-GDP ratio has increased from about 40% when President Moon Jae-in’s administration took office in 2017.

The announced spending plan announced by South Korea today is seen as a move to strike a balance between pouring money into essential social services to boost an aging economy and reducing income inequality. imports are increasing; while avoiding further stress on the national financial situation.

Korea is considered to be the fastest aging economy among the members of the Organization for Economic Co-operation and Development (OECD). Under the plan, about a third of total spending, or 216.7 trillion won, will be allocated to enhance welfare and employment, and cover increased social costs stemming from related long-term problems. population aging.

Before that, the Korean government also spend 11,900 billion won to spend on environmental related sectors towards the goal of being carbon neutral by 2050, along with a budget of 55.200 billion won on defense.

South Korea’s Finance Ministry said it will issue 167.4 trillion won of bonds in 2022 and the value of treasury bonds is expected to increase by 94.9 trillion won.

Five days ago, the Bank of Korea (BoK) announced an upstream decision, making Korea the first developed economy in the world to raise interest rates right in the middle of the pandemic. Accordingly, the agency raised interest rates by 25 basis points to 0.75%. This is also the first interest rate hike by the Bank of Korea in nearly three years.

According to Bank of Korea Governor Lee Ju-yeol, there are still internal disagreements over the decision to raise interest rates. Analysts said the move by the Bank of Korea was a “reluctant rate hike”, although the market “fully expects a series of rate hikes”.

Most central banks globally have lowered interest rates to record lows in an attempt to bail out economies hit by the Covid-19 pandemic. From the US to Europe and Asia, governments here have been implementing many stimulus measures to support businesses.

Commenting after South Korea’s move to raise interest rates, economic research and consulting firm Capital Economics emphasized: “It must be affirmed that Covid-19 remains a big challenge for the economic recovery.”

“Financial stability risks, such as household debt balances and rising housing prices, are an issue not only this year, or last year, but at least in the past five years. So when there is opportunity… The Bank of Korea will continue to normalize interest rate policy,” said Mr. James Lee, chief economist at HSBC.