Crossing the 50% National Debt Ratio Is a Matter of Time... The Issue Lies in Principles

National Debt Reaches 815.5 Trillion Won by Year-End Even with Only the 1st Supplementary Budget Reflected

Debt Ratio Exceeds 40% When Including 2nd and 3rd Supplementary Budgets

Experts Divided Over Fiscal Soundness

Calls for Passage of Fiscal Soundness Act

Concerns Over Operational Constraints if Numbers Are Fixed

[Asia Economy Reporters Joo Sang-don (Sejong) & Jang Se-hee] As unprecedented global efforts to overcome the novel coronavirus disease (COVID-19) involve massive government spending, concerns over fiscal soundness are growing. National debt, reflecting the 1st supplementary budget, is expected to rise to 815.5 trillion won by the end of the year. Including the already approved 2nd supplementary budget and the anticipated 3rd supplementary budget, the debt ratio is projected to exceed 40%. Experts emphasize that the government must establish clear standards and principles for fiscal execution during the COVID-19 response process.

According to the May issue of the Fiscal Trend report released by the Ministry of Economy and Finance on the 7th, the national debt is expected to increase by 51.9 trillion won from 763.6 trillion won as of March to 815.5 trillion won by the end of this year. This figure only includes the burden of government bond issuance related to the 1st supplementary budget.

As national debt rises, the debt-to-GDP ratio will increase to 41.2%, up 4.1 percentage points from last year's 37.1%. The problem is that if the 2nd supplementary budget and the 3rd supplementary budget (assumed at 30 trillion won) are also included, the government bond amount will increase to 819 trillion won and 849 trillion won respectively, pushing the debt ratio up to 42.9%. This represents a sharp rise of 5.8 percentage points within a year. The increase in the national debt ratio could trigger a vicious cycle involving a downgrade of the country's credit rating, a rise in the won-dollar exchange rate, and capital outflows by foreign investors.

However, experts are divided on the sharp rise in the debt ratio. While some argue that additional expansionary fiscal policy is necessary considering the scale of COVID-19 damage despite concerns over fiscal soundness, others worry that in an era of low growth, the reduced capacity to repay could impose a greater burden on the Korean economy.

Lee Joon-gu, Emeritus Professor of Economics at Seoul National University, stated, "Depending on the situation, it may be necessary to temporarily abandon fiscal soundness and boldly utilize deficit financing," adding, "If additional government spending through bond issuance revitalizes the economy and enables future generations to earn higher incomes, the argument that the burden is passed on to future generations lacks validity."

Hong Ki-yong, Professor of Business Administration at Incheon National University, argued that fiscal soundness is already at a concerning level and further expansionary fiscal policy should be avoided. He pointed out, "Some say it's acceptable because the ratio is significantly lower than the OECD member average (about 110%), but an increase of over 5% is quite worrisome," and added, "In 2018, 18 trillion won was paid in bond interest, and this burden has increased with the expansion of bond issuance."

While the low interest rate environment has led to lower government bond yields, concerns remain that the actual burden could still be significant due to declining growth rates. Kim So-young, Professor of Economics at Seoul National University, noted, "Although government bond yields have decreased, reducing interest costs, the severe slowdown in growth will cause significant damage," and emphasized, "As growth rates fall, the capacity to repay debt diminishes accordingly." The lowest government bond yields (3-year maturity) were recorded at 6.800% during the 1998 IMF foreign exchange crisis, 3.410% during the 2008 financial crisis, 1.781% in 2018, and most recently 0.960% yesterday.

In particular, if supplementary budgets are formulated out of inertia to stimulate the economy, it may only be a matter of time before the national debt ratio surpasses 50%. Professor Hong expressed concern, saying, "The government predicted in the 2019 medium-term fiscal plan that the debt ratio would exceed 46% by 2023 due to low birth rates and aging," adding, "This forecast did not reflect the impact of COVID-19, so considering that, it will soon exceed 50% by a wide margin."

As the national debt increases significantly every year, there are calls for clear standards to be established. The Ministry of Economy and Finance submitted a Fiscal Soundness Act to the National Assembly in 2016 during the Park Geun-hye administration, which included a 'national debt ratio limit of 45%', but it remains pending. With the end of the 20th National Assembly, it is expected to be automatically discarded. This time, the Ministry may avoid specifying a particular figure for the national debt ratio and instead propose a 'fiscal rule guideline.' A ministry official said, "If specific numbers are included in the Fiscal Soundness Act, it would impose significant constraints on flexible fiscal management," adding, "Without exceptions for unforeseen situations like COVID-19, violating the law could become a heavy burden."

This content was produced with the assistance of AI translation services.