By Kim Jae-kyoung
A time bomb is ticking: snowballing national debt. Korea’s national debt has increased at a rapid pace, spawning fears that the country could face a debt crisis akin to the one Europe has gone through in the wake of the global financial crisis.
What is of greater concern is that the pace of the debt growth is expected to gain momentum as the government must eventually spend more and more due to the rapidly aging population and possible reunification of the two Koreas.
With snowballing debt, the ability of the Lee Myung-bak administration to manage the debt is being put into question. Korea has been in the limelight in the global community following the global financial crisis thanks to its fiscal soundness. In 2007, the ratio of Korea’s national debt to Gross Domestic Product (GDP) stood at 30.7 percent, well below the European Union (EU)’s 59.3 percent.
However, the nation’s fiscal health has been worsening since President Lee took office and is expected to deteriorate further due to extensive expenditure on health and welfare. The national debt rose by 92.5 trillion won for the first two years of the Lee administration, compared to the 39 trillion won in growth during the five years under the former Roh Moo-hyun administration.
According to the Korea Institute of Public Finance, Korea’s debt-to-GDP ratio will reach as high as 116 percent in 2050, a level similar to the EU’s 125 percent. When debts of state companies are factored in, the number rises dramatically. According to the Bank of Korea (BOK), the nation’s public debts combined ― the government and state companies ― reached 683 trillion won in June, 61 percent of the nation’s GDP.
The key culprit behind the ballooning debts is the government’s short-sighted fiscal policy and overly relaxed way of thinking.
“The government and state companies have churned out mega projects requiring a huge amount of taxpayers’ money without thoroughly studying the feasibility of such projects,” Sungkyunkwan University professor Lee Chae-woong told The Korea Times.
“Loose spending on welfare and a populist tax cut plan should be also blamed. But the real problem is that the government is not taking the debt problem seriously, only citing favorable data, such as the ones from the OECD.”
The government has dismissed the debt concern, claiming that Korea’s debt-to-GDP level is well below the OECD average and thus the nation’s fiscal status is in healthy shape.
Experts said that the government should manage debts in a more conservative manner, considering upcoming challenges that will affect the nation’s fiscal soundness.
“It is true that the current debt level for Korea is below those of advanced countries. However, given that the country will have huge expenditures due to an aging population and the possible reunification of two Koreas, now is the time for the government to seek ways to reduce debts,” KDI senior economist Koh Young-sun said.
“In addition, the government should be more cautious in comparing Korea’s debt-to-GDP level to other countries as every county is in a different situation. For example, global investors do not have firm confidence in the domestic financial market as they have in advanced countries,” he added. “I believe that the government, if possible, should aim to lower the dept-to-GDP level to the pre-Asian currency crisis level of around 10 percent.”