ED Warning against debt explosion
Steps needed to tackle low birthrate, aging population
The International Monetary Fund (IMF) has issued a warning for Korea to take preemptive measures against a possible “explosion” of its national debt due to the ongoing low birthrate coupled with rapid aging of the population. Andreas Bauer, assistant director and Korea mission chief for the IMF, said, “Korea's strong fundamentals, including a robust manufacturing sector and a quality labor force, will keep the debt manageable for now.”
However, Bauer warned against the possible risks that will come from healthcare costs and other liabilities associated with aging, which he said will pose a concern going forward. During an interview with Bloomberg, Tuesday, Bauer cited the need for the Korean government to “plan forward.” It is rare for a high ranking official of the IMF to send a warning to Korea by using relatively explicit rhetoric like “exploding debt.” This shows the seriousness of the national debt problem unless appropriately it is checked.
According to the IMF Fiscal Monitor released earlier this month, Korea's debt will likely reach 53.2 percent of gross domestic product this year and increase to 69.7 percent in 2026. This runs counter to government guidelines, announced in October last year, for fiscal soundness to keep the debt rate within 60 percent annually. The IMF seems to have judged that Seoul will not be able to maintain the guidelines given the current pace of debt increase.
Regarding feasible factors behind the possible debt explosion, Bauer cited the rapidly aging population. He said Korea will be able to manage fiscal spending to cope with the coronavirus pandemic as it has a strong fundamentals. Yet what matters is the fast rise in the cost for healthcare amid the graying population, he added.
The low birthrate will lead to a decline in the working age population alongside the rise in the number of elderly people who need social care. Unless the economy continues to grow, government income will dwindle though spending will continue to increase, possibly resulting in exploding debt. Take Japan for instance. Tokyo's national debt rate to GDP stood at only 38 percent in 1991; but the rate soared to 100 percent in 2000 and 200 percent in 2010. Japan's debt has continued to snowball, reaching 266 percent last year.
We need to learn lessons from Japan.
What is further worrisome is the pace of aging in Korea has been faster than that of Japan. The National Assembly released a report last month, saying the number of senior citizens that every 100 working age (between 15 and 64) people should care for reached 39.7 in 2020. The number will likely increase to 76.1 in 2040.
The government and the Assembly should make concerted efforts to come up with new guidelines to keep the debt at a proper level, including measures for effective fiscal expenditure. If necessary, there should be a debate on the possibility of raising taxes. The government also needs to take steps to find a solution to the low birthrate as soon as possible.