ed Sovereign debt woes

Preemptive measures needed to maintain fiscal health

Debt owed by the central government has surpassed 500 trillion won for the first time, casting a pall over the nation’s long-term fiscal soundness.

A monthly report on fiscal trends released by the Ministry of Strategy and Finance showed that the central government’s debts totaled 503.3 trillion won as of July 31 this year, up 8.6 trillion won from a month earlier.

The figure already exceeded the ministry’s debt projection of 499.5 trillion won for this year under its mid-term fiscal management plan for 2014-18. The finance ministry admitted that the central government’s debt will continue to swell for now due to sluggish tax revenue, but said that the projection would be met by the end of the year.

The central government’s rising debt may come as no surprise, given that public firms and households as well as both the central and provincial governments have been ridden with snowballing debts in recent years, but the fact that it exceeded 500 trillion won should be a wake-up call.

The biggest problem is that the debt has been soaring at an alarming pace. The central government’s debt surged by nearly 40 trillion won in the seven-month period, following a 39 trillion won jump last year.

But tax revenue remains stagnant because of the prolonged economic slump. During the first seven months of this year, tax revenue remained at 124.2 trillion won, up 1.8 trillion won from the same period of 2013. But this represents only 57.5 percent of the government’s target, which is lower than last year’s 60.7 percent. This year’s tax revenue shortfall is expected to reach about 10 trillion won, following an 8.5 trillion won shortfall last year.

What’s more, the country’s national debt, which amounted to 489.9 trillion won including 464 trillion won in the central bank’s debt at the end of 2013, will go up further because the finance ministry has clarified its willingness to continue its expansionary fiscal policy for a considerable time.

Last week, the finance ministry unveiled a record 376 trillion won budget for 2015, which represented a year-on-year increase of 5.7 percent, the biggest rise since 2009 when the nation was hit hard by the global financial crisis. The government aims to expand tax revenue after jacking up the moribund economy through bold pump-priming measures, which would in turn help improve our fiscal balance in the long run, and this seems inevitable, considering the magnitude of the current economic downturn.

It would be good if the expansionary budget policy helped kick-start the economy, but there is also fear that the results could be disastrous, especially for the country’s fiscal health, if the government’s projection goes astray.

It’s never too early or too late to start paying attention to the swelling sovereign debt. The government needs to nurse the economy back on track through various fiscal and financial measures at the moment, but preemptive measures are needed to maintain our fiscal soundness. Repentance often comes too late.