The Democratic Party unveiled a supplementary budget plan worth 35 trillion won, presenting not only Government Bonds issuance but also 'expenditure restructuring' and 'discovery of surplus funds from various funds' as methods for securing resources. However, looking at the fund and budget situation, it appears that Government Bonds will have to bear most of the burden. This means that as the scale of the supplementary budget increases, the issuance of Government Bonds will inevitably rise. There are calls to consider 'fiscal health' seriously during the preparation of the supplementary budget.
According to the political circles on the 14th, the Democratic Party announced its own supplementary budget plan worth 35 trillion won on the 13th. During a subsequent press conference, Park Jin-sung, chair of the Democratic Party's policy committee, noted regarding the methods of securing resources, "The scale of budgets not spent by the government exceeds 30 trillion won," adding, "We can explore the surpluses of various funds as much as possible within special accounts, and if that is insufficient, we can issue Government Bonds."
◇ "Housing fund, foreign exchange fund?… The scale of funds that can be mobilized is extremely small"
Looking at each item, mobilizing surplus funds from the funds is a method that has been actively used during the 'tax revenue shortfall' in 2023 and 2024. The most frequently mentioned are the 'housing & urban fund' and the 'foreign exchange stabilization fund (foreign exchange fund).' Last year, to cover a 30 trillion won deficit, these two funds were mobilized for approximately 2 trillion to 3 trillion won and 4 trillion to 6 trillion won, respectively. When this measure was announced at the time, the opposition criticized it, saying, "Using the housing fund based on savings subscriptions for housing," and "It weakens the ability to respond to the foreign exchange market."
The housing & urban fund, which is created through the savings of the public's subscription deposits and the issuance of bonds, has recently seen a significant decline in its surplus funds. Last June, before being mobilized for the response to the revenue shortfall, the average surplus fund balance (15.8 trillion won) had already decreased by 68% compared to 2021 (49 trillion won). This is because the number of subscribers for housing savings decreased, but the demand for policy loans increased.
The budget authorities also believe that the scale of available surplus funds will be very small. A Ministry of Strategy and Finance official stated, "While we may utilize some funds with surplus reserves, including the housing & urban fund and the Employment Insurance Fund, it will be extremely small," adding, "It seems that most of the supplementary budget will need to be raised through the issuance of Government Bonds."
It will also be difficult to further draw on the foreign exchange fund, which has been mobilized during revenue shortfalls. Above all, starting this year, the issuance of 'Korean won foreign exchange stabilization bonds' after 22 years could lead to more controversy when mobilizing.
The foreign exchange fund, used for stabilizing the exchange rate, contains a mixture of foreign currency (dollars) and Korean won. If Korean won foreign exchange bonds are issued, it will result in an accumulation of 'won' in the foreign exchange fund. This was planned to prepare for a decline in the won-dollar exchange rate, but it could face criticism when mobilized for the supplementary budget, stating that "Korean won foreign exchange bonds are being issued to fund the supplementary budget."
Above all, the argument that excessive mobilization of surplus funds from the funds does not align with the purpose of formulating the supplementary budget has emerged. An official from the Ministry of Strategy and Finance explained, "In the past two years when responding to tax revenue shortfalls, surplus funds were maximally utilized to avoid supplementary budgets," adding, "When a supplementary budget is created, it allows for the issuance of Government Bonds, so there is no reason to go that far."
◇ "Expenditure restructuring has never been done in the first quarter during the 16 supplementary budgets"
In a situation where both the argument that 'the supplementary budget should be expedited' coexists, the opinion is dominant that 'expenditure restructuring' is also not easy. A budget policy expert said, "Expenditure restructuring involves gathering and reducing claims like 'it was difficult to execute the budget for certain reasons,' or 'it seems that the budget is too much allocated,'" adding, "This can only be known to some extent after the project has been undertaken. As the government has not long passed since confirming its budgetary plan, if it immediately begins to make active expenditure adjustments, it cannot avoid criticism of 'whether the budget was initially overly allocated.'"
In fact, looking at the resource mobilization methods of past supplementary budgets, there has never been a case where 'expenditure restructuring' has accompanied in the first quarter. Throughout the 16 supplementary budgets, there were only four instances where resources were secured through expenditure restructuring. Among those, three instances (2013, the second of 2020, and the second of 2022) took place in the second quarter, and one instance (the third of 2020) occurred in the third quarter.
The opposition also claims that expenditure restructuring is possible, asserting that 'the scale of budgets unused by the government exceeds 30 trillion won,' which is a mistaken assertion. According to the 'settlement of accounts for the 2024 fiscal year,' the 'effectively unused amount' (20.1 trillion won) after deducting amounts that are subtracted when interoperated with national tax revenue is 9.3 trillion won. After excluding the unspent reserve fund (2.5 trillion won), the pure 'project expenditure surplus' is 6.8 trillion won.
◇ Government Bonds is nearly the only method for resource procurement… Efforts for fiscal health 'wasted'
Therefore, the government views that issuing Government Bonds is practically the only method available for securing resources. If there are no offsets from funds to cover total revenue, the issuance of Government Bonds is solely accounted for as an increase in total expenditure.
According to the budget approved by the government and the National Assembly this year, the planned consolidated fiscal balance without social security fund and its ratio to Gross Domestic Product (GDP) are a deficit of 73.9 trillion won and -2.8%, respectively. Although it had pledged for the first time to adhere to the 'fiscal rule' standard of maintaining the management balance ratio at 'within -3%,'' even issuing just 5 trillion won of deficit Government Bonds would already bring it to '-3%', making it impossible to keep the promise.
If we simply add the scale of this supplementary budget to the consolidated fiscal balance without social security fund, it would hypothetically result in a worst-case deficit ratio of -4.1%. Although the government has reduced this ratio, which serves as an indicator of fiscal health, from -5.4% in 2022 to -3.9% in 2023 and an estimated -3.9% in 2024, if the government indiscriminately issues deficit Government Bonds on a large scale, it could return to a level similar to that during the COVID-19 pandemic.