3rd extra budget raises fiscal soundness concerns

High-level government officials attend a meeting to discuss long-term fiscal management plan at Cheong Wa Dae, Monday. / Yonhap

By Lee Kyung-min

The government plan to ask for at least 30 trillion won ($24 billion) in a third extra budget is adding to concerns about the country's fiscal soundness, as there will be few options but to issue debt to finance a slew of emergency relief measures to prevent the virus-hit economy here from crashing further.

The administration maintains that Korea's fiscal soundness measured by debt-to-GDP ratio is much healthier than most OECD member states, stressing that the only way to help the flagging economy amid the COVID-19 pandemic is via prompt stimuli.

The virus-triggered economic emergency notwithstanding, however, economists say policy makers should beware of climbing yields on government bonds, an indication that investors could ditch won-dominated debt for that issued in one among a number of major currencies at any sign of possible deterioration in debt management.

The passage of the third extra budget is expected to pick up speed at the National Assembly after President Moon Jae-in called for the “strongest-yet” stimulus measure to limit the worse-than-feared economic fallout from the new coronavirus.

“When fighting a fire, sufficient water is required in the first critical hours to promptly bring the situation under control and stop the blaze from spreading and creating further damage,” Moon said at the beginning of a high-level meeting convened to discuss the country's long-term fiscal soundness plan, Monday.

At the top of the meeting's agenda items was the rapid increase in government debt over the past few years.

Data from the National Assembly Budget Office showed government debt stood at 772.5 trillion won, Tuesday, a per capita debt of 14.9 million won. This is up from 740 trillion won in 2019 and 680 trillion won in 2018.

More problematic is that 2020's figure is set to rise further due to the third extra budget, with the figure increasing to 850 trillion won, pushing up the debt-to-GDP ratio to 44.4 percent, up 6.3 percentage points from a year earlier.

This is a 14.2 percent year-on-year increase, the sharpest since 16.4 percent in 2009 following the global financial crisis.

Seoul National University economist Kim So-young said comparing debt-to-GDP ratio to the OECD average is misleading, as some members are experiencing or have undergone a financial crisis.

“Countries like Greece and Portugal have a ratio well above 100, and their fiscal management is far from what Korea should emulate. As for other countries with high figures such as the U.S. or Japan, their currencies are among eight major currencies recognized as stable and a relatively safe asset to hold. The government should be mindful that the spending means debt to pay back, however delayed the due date may be,” he said.