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South Korea drafts bold spending plan, taking debt to 50% of GDP

Prospect of achieving fiscal balance dim in final annual budget for Moon

South Korean President Moon Jae-in's new budget is seen as a balancing act between pouring funds into badly needed social services and avoiding further strain on the country's finances.   © Reuters

SEOUL (Reuters) -- South Korea's government on Tuesday unveiled an aggressive spending increase in the final annual budget of President Moon Jae-in's five-year term, pushing out any prospect of achieving balanced budgets amid a worsening fiscal deficit.

South Korea plans to spend a record 604.4 trillion won ($518.4 billion) next year, 8.3% more than this year's budget before two emergency supplementary spendings drafted to offer pandemic relief to households.

The record spending plan will take South Korea's debt-to-gross domestic product (GDP) ratio to 50.2%, the largest on record.

"Our debt will exceed 50% (of the economy) in the medium-term, but, as we start to turn things around for a better fiscal standing we expect a sizable improvement in fiscal balance of payments next year," a budget official at the finance ministry said.

By 2025, South Korea expects the ratio at 58.8%, according to the ministry.

The coronavirus pandemic has forced the left-leaning Moon Jae-in government to compromise on its fiscal goals, offering ambitious pandemic relief packages in six extra fiscal outlays since early last year. The debt-to-GDP ratio has ballooned from about 40% when it took office in 2017.

The Aug. 31 budget is seen as a balancing act between pouring funds into badly needed social services to tackle an ageing economy and reduce rising income inequality, while avoiding putting further strain on the country's finances.

About a third of the total expenditure, 216.7 trillion won, will be allocated for welfare and jobs, to cover rising social costs as the fastest-aging economy among the Organization for Economic Co-operation and Development (OECD) creates long-term problems for the country.

The government has also earmarked 11.9 trillion won for spending on environment-related areas to work towards the country's carbon neutrality goal by 2050, and proposed 55.2 trillion won in spending on national defense.

The finance ministry said it will issue 167.4 trillion won of bonds in 2022. The net increase in treasury bonds is projected at 94.9 trillion won.

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