The nation’s government debt has swelled sharply under newly adopted accounting rules that reflect international norms, raising concern that the incoming administration may grapple with mountains of debt during its five-year term.
The Ministry of Strategy and Finance said Korea’s government debt amounted to about 468 trillion won last year, a whopping increase of 48 trillion won from the 420 trillion won under the previous accounting regulations. As a result, the percentage of government debt to gross domestic product (GDP) rose from 34 percent to 37.9 percent.
The finance ministry dropped the International Monetary Fund’s 1986 yardstick and adopted its 2001 criterion to bring its debt statistics in line with international standards.
The new accounting rules envision calculating debt on an accrual basis, different from the previous cash-based method. Simultaneously, the new statistics included 151 non-profit public organizations such as the Korea Asset Management Corp. and the Korea Deposit Insurance Corp.
True, the country’s fiscal soundness, as measured by the new standard, is still healthy compared with bloated debt burdens among industrialized countries. While Korea’s new debt-to-GDP ratio remained at 37.9 percent, the corresponding figure in Japan reached 205 percent. The average debt-to-GDP ratio among the member countries of the Organization for Economic Cooperation and Development (OECD) was 103 percent.
Nonetheless, it’s too early to boast the nation’s long-term fiscal health, given explosive demands for welfare and the need to prepare for unification.
What matters most is that large amounts of other public sector debts remain hidden. First of all, much of the debt owed by the nation’s major state-run companies such as the Korea Land & Housing Corp. (LH) is not included in the new statistics. LH is expected to see its debt swell to nearly 150 trillion won next year.
The statistics don’t include 108 trillion won in state bonds held by the National Pension Service, either. And liabilities for pensions to be offered to former and incumbent civil servants and soldiers worth about 342 trillion won are also omitted from the tally. Some critics say the country’s real public sector debt surpassed 1,000 trillion won.
Worse yet, the speed at which debt is expanding in recent years seems fastest among the OECD members, prompting skeptics to warn that Korea may fall victim to the sovereign debt debacle like some European countries such as Greece and Spain.
With the adoption of the new accounting rules, the incumbent government’s plan to lower the nation’s debt-to-GDP ratio to less than 30 percent by 2015 appears unattainable. Under the previous yardstick, the debt-to-GDP ratio was forecast to fall to 33.2 percent next year, 31.4 percent in 1014 and 29.9 percent in 2015.
Most worrisome is that the incoming administration will face the challenging task of expanding welfare in the midst of the worsening fiscal status. What is needed most is for President-elect Park Geun-hye to grasp the true picture of our public-sector debt and manage the debt systematically. The Park administration should not try to fulfill election pledges at the expense of fiscal health.