South Korea said Tuesday it plans to maintain an expansionary fiscal policy next year to underpin an economic recovery from the pandemic, but it will also seek to enhance fiscal soundness amid mounting national debt.

Under the 2022 budget guidelines, approved by the Cabinet, the country aims to prop up the economy and invest in key policy initiatives for the post-pandemic era, while improving fiscal efficiency, according to the Ministry of Economy and Finance.

The South Korean economy contracted 1 percent last year, the first yearly retreat since the 1997-98 Asian financial crisis, due to the COVID-19 pandemic.

Asia's fourth-largest economy is on a recovery track, supported by robust exports. But domestic demand and the job market still remain sluggish, with recovery being uneven across sectors.

"With fiscal spending, we need to bring the economy clearly back to a normal track and continue to invest in key areas to promote innovation and inclusive growth," Ahn Do-geol, a senior ministry official in charge of budget affairs, said at a press briefing Friday.

"But we should also make efforts to ensure that public finances should be sustainable over the medium and long term."

The country drew up a record 558 trillion-won ($493 billion) national budget for this year, up 8.9 percent from 512.3 trillion won last year. It recently created a 15 trillion-won extra budget, the fifth of its kind, to finance another pandemic aid package.

Under the 2020-24 fiscal management plan unveiled last September, the government set the growth rate of its total expenditures at 6 percent for next year. But the rate could be changed, depending on COVID-19 situations.

The finance ministry said it will expand fiscal spending next year to revitalize economic activity, invest in future-oriented sectors, enhance the social safety net and guarantee people's safety and quality of life.

To buttress the economic recovery, the ministry aims to spur consumption and investment and revive the job market.

Private consumption declined 1.5 percent on-quarter in the fourth quarter of last year. The country reported job losses for the 12th straight month in February, led by employment erosion in in-person service sectors.

The country will ramp up investment in its signature green and digital New Deal initiatives and lay the groundwork for achieving the carbon neutrality goal by 2050.

South Korea has carried out massive fiscal spending to minimize severe economic fallout from the pandemic, but the country's national debt has grown at a faster pace.

The finance ministry stressed the country should make efforts to manage state coffers at a sustainable manner in the face of growing fiscal pressures, including rapid aging.

With the latest extra budget, the national debt is expected to reach 965.9 trillion won this year. Its debt-to-gross domestic product (GDP) ratio will likely reach 48.2 percent this year, up from 43.9 percent the previous year. The country is also forecast to log a fiscal deficit of 89.6 trillion won.

The government forecast the country's debt will increase to 1,091 trillion won next year. If more extra budgets are created this year, the debt may top the 1,000 trillion-won mark this year.

In an effort to restructure fiscal expenditures, the ministry plans to consider gradually rolling back one-off spending projects introduced to cope with the pandemic.

The country will make efforts to broaden the taxation base and push to adopt rule-based fiscal frameworks to manage the debt level.

The finance ministry unveiled the proposal last year, which would limit its debt to 60 percent of GDP and its fiscal deficit to 3 percent starting in 2025. The new rule is subject to parliamentary approval.

The budget guidelines will be used for government ministries and agencies in writing their budget spending plans. The finance ministry will review their budget requests and submit a national budget proposal to the National Assembly by Sept. 2. (Yonhap)