Is Korea Safe From Budget Deficit Burden?
By Yoon Ja-young
Staff Reporter
The fiscal crisis affecting some countries in Southern Europe is driving the global financial market into a panic, and while Korea seems safe in terms of its fiscal deficit for now, experts are showing concern over the steep pace of its growth.
The concern over the fiscal deficit of the so-called PIGS countries ― Portugal, Italy, Spain and Greece ― is now spreading to other developed countries that poured in money to stimulate their economies.
Korea seems safe in terms of the numbers. The ratio of fiscal debt to GDP stood at a mere 2.8 percent in 2009, which compares with 12.7 percent in Greece and 9.3 percent in Portugal.
The ratio of state debt to GDP was 35.6 percent last year, less than half of the G-20 average of 75.1 percent.
However, this isn't the case when including the debt of state run enterprises, which is excluded in the state debt figure.
The debt of the government ― both central and local ― and social welfare funds such as the National Pension Fund, and state run enterprises totaled 611 trillion won as of September last year, up 23.1 percent from a year ago and reaching 59.1 percent of GDP.
The situation gets more serious when adding the debt of public financial institutions such as the housing, deposit insurance and public capital redemption funds. When including these, the debt of the public sector rises to 710 trillion won, or 69 percent of GDP.
"The fiscal soundness of Korea is not at an alarming level as yet, but the government should set up a long-term plan to maintain fiscal soundness considering the increasing budget spending following the global crisis and uncertainties in the economy," said Park Hyun-soo, a researcher at Samsung Economic Research Institute, showing concern over the steep pace of the rising debt..
He advised that fiscal policies that have had little effect in boosting the economy should be abolished right away. "The money should be spent more effectively," he added.
The problem is that debt is expected to increase further with an aging society, low birthrates and the retirement of baby boomers. There will be fewer workers to pay taxes while social welfare spending for senior citizens will increase.
Moreover huge infrastructure projects are planned, incurring huge debt. Sejong City, for example, is to cost 12 trillion won, while 22.4 trillion won has been allocated to the four river project. The government also plans to spend 21 trillion won on Saemangum.
It is preparing a scheme to restructure budget spending to enhance fiscal soundness.
The administration had planned the fiscal deficit at 2.9 percent of GDP upon the estimation that the economy would grow 4 percent, but it is planning to manage the deficit at below 2.7 percent, after pulling up its growth estimation to 5 percent.
Some government projects will see budget cuts. The tax cut plan for people with a high income and businesses has been delayed for two years to bolster state revenue.
The National Tax Service is seeking to strengthen taxation on high income professionals, or businesses such as restaurants and lodging facilities, where tax evasion often occurs.