National Debt Smaller Than Expected

By Lee Hyo-sik

Staff Reporter

The nation's fiscal soundness is expected to improve this year, as state debt is estimated to be smaller than previously anticipated due to a faster-than-expected economic rebound.

This is good news for Seoul policymakers. They are now putting their heads together to come up with measures to prevent the country from a "debt trap," which many European countries are falling into.

The Ministry of Strategy and Finance said Thursday that with rising fiscal income and falling state expenditure, the government is projected to post about a 30 trillion won deficit this year, much smaller than the over 40 trillion won shortfall in 2009.

It is estimated that state debt will likely reach around 390 trillion won this year, smaller than its earlier forecast of 407.1 trillion won. The nation's liabilities totaled 359.6 trillion won in 2009, down from the government's earlier estimate of 366 trillion won.

The downward debt projection is largely attributed to stronger-than-expected economic expansion, fewer bond issuances, and growing tax revenue.

The Korean economy is expected to grow about 5 percent this year, while the government will not issue as many bonds as it did last year. Tax revenue will also likely increase as a result of stronger private sector activities.

Tax revenue jumped by 29.2 trillion won to 261.3 trillion won last year from 2008 and revenues from operating the National Pension Fund and 62 other state-run funds totaled 12.4 trillion won. Also, last year's tax surplus transferred to this year's budget amounted to nearly 3 trillion won, which is also expected to scale down the overall debt amount.

The debt-to-GDP ratio is also projected to reach 35.2 percent by the end of this year, down from an earlier forecast of 36.9 percent.

"In 2009, state debt was 6.4 trillion won less than we had previously expected. We think this year's liabilities will decline by a larger margin on the back of a strong economic growth, possibly to below 390 trillion won. We are positive that Korea's fiscal health will be in a much sounder position this year than we earlier thought," a ministry official said.

The ministry also said that the government budget, which excludes the social security-related balance, will record 30.1 trillion won in the red this year. But the figure is sharply lower than last year's 43.2 trillion won shortfall.

The broader consolidated fiscal budget, which includes general and special accounts and state funds as well as welfare-related spending, is projected to post a 2 trillion won deficit in 2010, down sharply from a 17.6 trillion won shortfall in 2009.

The nation's surging national debt has emerged as one of the biggest downside risks for Asia's fourth largest economy over the past few years as the government outspends its earnings to finance expanding the social safety net and other welfare-related programs.

In particular, Korea's fiscal soundness has been deteriorating rapidly in the aftermath of the unprecedented worldwide economic crisis last year, with the government borrowing record amounts of money to prop up the sagging economy.