Gov't to curb spending for fiscal soundness

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By Lee Kyung-min

The government said Monday that it has begun discussing ways to manage fast-growing debt on a steep rise, due to a spike in mandatory and fiscal spending brought on by the COVID-19 pandemic.

The announcement signals that the record-high growth of debt due to a year of expansionary policies needs to slow down, an objective the government says will be achieved by the implementation of a newly outlined fiscal discipline by 2025.

An effort will follow to reduce the one-off increase in expenditures granted to state-run projects.

Government spending will prioritize ways to bolster exports and corporate investments, two growth drivers underpinning the country's economy. A balanced recovery is needed that includes low-income earners who lost jobs during the past year.

The Ministry of Economy and Finance plans to keep the government debt-to-GDP ratio under 60 percent, while limiting the consolidated fiscal deficit to less than 3 percent of the country's GDP.

A deficit of up to 4 percent of the GDP is allowed in limited situations following an economic crisis. An economic crisis is defined by a clear slowdown, as illustrated by a drop in industrial output and employment data.

The government debt-to-GDP ratio stood at 43.9 percent last year, which is the first time that the figure has surpassed the 40 percent mark. The year-on-year increase of 6.2 percent resulted from a combined 67 trillion won ($57 billion) in four extra budget bills, drafted to fund emergency stimulus packages during the pandemic. The figure will be 48.2 percent this year, and is predicted to soar further to 52.3 percent in 2022.

At the heart of the problem is the rapid increase of the government debt-to-GDP ratio figure, according to experts. It took nine years for the figure to rise from 30 percent to 40 percent but only three years will be needed for it to exceed 50 percent in 2022.

The figure is expected to spike another 10 percent to over 60 percent in just three years thereafter.

“The rapid increase in the debt can lead to a downgrade of the country's credit rating,” Seoul National University economist Kim So-young said. “The ratio had remained under 40 percent for decades, but it has risen more than 20 percentage points in just five years. A drastic measure will be needed to slow the pace of the debt's growth.”

According to a fiscal outlook report for 2020 through 2060, released in September of last year by the ministry, if all continues in the same manner, Korea's debt-to-GDP ratio is expected to rise to 81.1 percent in 2060, nearly double the 43.5 percent that it was last year.

This increase was based on the premise that economic and fiscal policies will remain unchanged from the status quo. The figure will jump further to 92 percent, if the government puts in place mandatory spending of 60 trillion won from 2025 to 2060, due to a spike in interest payments on government debt, as well as payouts to subscribers of the state pension system and elderly low-income earners. But the figure could be reduced to 64.5 percent if government efforts are successful in tackling the low birthrate ― adding more people to the workforce, bolstering productivity and providing more tax revenue.

Korea's combined fiscal balance recorded a record-high deficit of 71.2 trillion won last year, about 3.7 percent of the country's GDP. This figure was the highest since 1982, when it was 3.9 percent.

The fiscal balance, which excludes four social funds that always produce a surplus (national health insurance, the national pension fund, employment insurance, and industrial accident insurance), recorded 112 trillion won in deficit, more than double the figure of 54.4 trillion won from 2019. The fiscal balance was about 5.8 percent of the country's GDP, the highest figure to date.