[ED] Getting back to fiscal health
The country has taken on more debt, raising concerns about its fiscal strength. He could face devastating consequences unless he takes bold steps to reduce the debt. This is why the incoming administration of Yoon Suk-yeol must shift to fiscal tightening away from the fiscal easing of the Moon Jae-in government.
Korea’s national debt, which includes bond issues and borrowing by central and regional governments, stood at 967.2 trillion won ($796 billion) last year, up 14% from 2020, according to a report by the Ministry of Economy and Finance. The debt growth rate is alarming even though the government has had to increase spending to deal with the economic fallout from the COVID-19 pandemic.
Last year, the Moon administration drew up two supplementary budgets amounting to 50 trillion won to provide financial support to businesses, especially smaller ones and the self-employed, to offset their losses caused by the pandemic. The sum was on top of the Liberal government’s annual mega-budget of 558 trillion won. This pushed the debt-to-GDP ratio to 47% in 2021 from 43.8% in 2020.
To make matters worse, the ratio is expected to rise further to 50.1% this year as the national debt is expected to reach 1.075 trillion won. Some economists predict that the ratio will reach 67% in 2026 if the upward trend in debt continues. However, the Moon government has so far turned a deaf ear to critics’ warnings against its spending spree.
It is no exaggeration to say that the country is on the verge of falling into the debt trap. Many countries around the world are now turning to fiscal tightening to absorb excess liquidity created by fiscal and monetary easing amid the pandemic. Korea should follow suit before it’s too late. The US Federal Reserve has already begun to wind down its quantitative easing program. It is now moving towards quantitative tightening while raising its key rate to tame the surge in inflation.
Consumer and business debt is also a concern. Household debt hit a record high of 1.862 trillion won at the end of last year, while corporate debt stood at 2.361 trillion won. Government liabilities – a total of bond issuance, borrowing and future pension payments – reached 2.196 trillion won in 2021, up 214.7 trillion won from 2020.
The president-elect is expected to focus on reducing the growing national debt. Its top candidate for prime minister, Han Duck-soo, said he would make efforts to restore fiscal strength if his nomination is approved by the National Assembly. Yet what is worrying is Yoon’s push for an additional 50 trillion won budget to fulfill his campaign promise to compensate small business owners and self-employed people for their losses resulting from the restrictions linked to the COVID-19. Such a budget, which seems inevitable to help those hardest hit by the pandemic, could also increase public debt and increase inflationary pressure.
Yoon and his economics team must do all they can to restore fiscal health and reduce skyrocketing household debt. They also need to rein in inflation, which jumped to 4.1% year-on-year last month, the highest level in a decade. The country cannot experience sustainable growth without tackling the debt problem and controlling inflation.