Fiscal soundness crucial to sustainable growth
The International Monetary Fund (IMF) said in a report Monday that Korea's ratio of national debt to GDP is expected to surge to 66.7 percent in 2026 from this year's estimate of 51.3 percent. The predicted steep increase is the highest among 35 advanced economies.
We have to take the report seriously although the projected figure is still half the average debt-to-GDP ratio of the 35 countries. What matters is that the ratio is rising at the fastest pace. Korea's ratio is forecast to jump by 15.4 percentage points over the next five years, followed by the Czech Republic (8.7 percentage points), Belgium (6.3 percentage points) and Singapore (6 percentage points).
The Moon Jae-in administration has continued to increase the national debt. It seemed inevitable to see the debt ratio grow sharply as the government had to dole out huge sums from the state budget to minimize the economic fallout from the COVID-19 pandemic. But the problem is that the liberal government has no intention of reducing the national debt to ensure fiscal health.
Next year's proposed government budget is estimated at 604.4 trillion won ($512 billion), up 8.3 percent from this year's outlay. This mega-budget, if approved by the National Assembly without any cutbacks, will force taxpayers to shoulder more of a financial burden and require the issuance of more state bonds. As a result, the country will continue to suffer a budget deficit in 2022 after recording a 70 trillion won shortfall this year.
Even before the public health crisis, the Moon government poured a large amount of taxpayers' money into creating public-sector jobs and increasing welfare benefits for low-income earners. Therefore it cannot avoid criticism for aggravating the country's fiscal health by recklessly increasing its spending based on populism.
More worrisome is that presidential candidates are competing to propose a fiscal expansion in the lead-up to the March 9 election. The ruling Democratic Party of Korea (DPK) has decided to accept its candidate Lee Jae-myung's proposal to provide COVID-19 relief aid worth 200,000 won to 250,000 won to every Korean in January. Yoon Seok-youl, the candidate of the main opposition People Power Party (PPP), floated the idea of earmarking 50 trillion won to pay compensation to small business operators and the self-employed for their losses arising from business restrictions under strict social distancing rules.
We must express concern about Lee's views on the nation's fiscal situation. He said Sunday that the government has collected 40 trillion won more in taxes this year than it had planned. Lee argues that the state coffers are full of money, making the case for the additional provision of relief money to everyone. But he should stop putting undue pressure on the government to accept his populist ideas.
Prime Minister Kim Boo-kyum and Finance Minister Hong Nam-ki have already voiced their opposition to Lee's proposal for the additional relief package, citing the lack of a dedicated budget. Now, politicians and policymakers should pool their wisdom to work out measures to check the rapid rise in the national debt and improve our fiscal soundness. Otherwise Korea cannot sustain economic growth, at a time when the country's potential growth rate is on the decline amid the low birthrate and aging population.
The International Monetary Fund (IMF) said in a report Monday that Korea's ratio of national debt to GDP is expected to surge to 66.7 percent in 2026 from this year's estimate of 51.3 percent. The predicted steep increase is the highest among 35 advanced economies.
We have to take the report seriously although the projected figure is still half the average debt-to-GDP ratio of the 35 countries. What matters is that the ratio is rising at the fastest pace. Korea's ratio is forecast to jump by 15.4 percentage points over the next five years, followed by the Czech Republic (8.7 percentage points), Belgium (6.3 percentage points) and Singapore (6 percentage points).
The Moon Jae-in administration has continued to increase the national debt. It seemed inevitable to see the debt ratio grow sharply as the government had to dole out huge sums from the state budget to minimize the economic fallout from the COVID-19 pandemic. But the problem is that the liberal government has no intention of reducing the national debt to ensure fiscal health.
Next year's proposed government budget is estimated at 604.4 trillion won ($512 billion), up 8.3 percent from this year's outlay. This mega-budget, if approved by the National Assembly without any cutbacks, will force taxpayers to shoulder more of a financial burden and require the issuance of more state bonds. As a result, the country will continue to suffer a budget deficit in 2022 after recording a 70 trillion won shortfall this year.
Even before the public health crisis, the Moon government poured a large amount of taxpayers' money into creating public-sector jobs and increasing welfare benefits for low-income earners. Therefore it cannot avoid criticism for aggravating the country's fiscal health by recklessly increasing its spending based on populism.
More worrisome is that presidential candidates are competing to propose a fiscal expansion in the lead-up to the March 9 election. The ruling Democratic Party of Korea (DPK) has decided to accept its candidate Lee Jae-myung's proposal to provide COVID-19 relief aid worth 200,000 won to 250,000 won to every Korean in January. Yoon Seok-youl, the candidate of the main opposition People Power Party (PPP), floated the idea of earmarking 50 trillion won to pay compensation to small business operators and the self-employed for their losses arising from business restrictions under strict social distancing rules.
We must express concern about Lee's views on the nation's fiscal situation. He said Sunday that the government has collected 40 trillion won more in taxes this year than it had planned. Lee argues that the state coffers are full of money, making the case for the additional provision of relief money to everyone. But he should stop putting undue pressure on the government to accept his populist ideas.
Prime Minister Kim Boo-kyum and Finance Minister Hong Nam-ki have already voiced their opposition to Lee's proposal for the additional relief package, citing the lack of a dedicated budget. Now, politicians and policymakers should pool their wisdom to work out measures to check the rapid rise in the national debt and improve our fiscal soundness. Otherwise Korea cannot sustain economic growth, at a time when the country's potential growth rate is on the decline amid the low birthrate and aging population.
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