Ongoing 'Gapronulbak' Over Soaring Debt Ratio

On the 8th, the third day since the transition to daily quarantine, the lobby of COEX in Gangnam-gu, Seoul is quiet. Photo by Mun Ho-nam munonam@

[Asia Economy Reporter Joo Sang-don] According to the recent fiscal trends announced by the government, the national debt, reflecting the first supplementary budget, will increase to 815.5 trillion won by the end of the year. Including the already passed second supplementary budget and the anticipated third supplementary budget, the debt ratio is expected to exceed 40% significantly. As a large amount of government funds are being injected to overcome the unprecedented global crisis of the novel coronavirus infection (COVID-19), concerns about fiscal soundness are also growing.

However, experts' opinions on the sharp increase in the debt ratio are divided. Despite concerns about fiscal soundness, some argue that additional expansionary fiscal policy is necessary considering the scale of COVID-19 damage, while others worry that in an era of low growth, the reduced capacity to repay could place a greater burden on the Korean economy. Experts also suggest that this situation should be an opportunity to establish clear standards and principles for fiscal execution.

According to the Ministry of Economy and Finance, 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 first supplementary budget.

As the national debt increases, the debt-to-GDP ratio will rise to 41.2%, up 4.1 percentage points from last year's 37.1%. The problem is that if the second and third supplementary budgets (assuming 30 trillion won for the third) are also included, the government bond size will increase to 819 trillion won and 849 trillion won respectively, pushing the debt ratio up to 42.9%. This means the ratio will surge by 5.8 percentage points within a year. The rise in the national debt ratio could be the starting point of a vicious cycle leading to a downgrade of the national credit rating, an increase in the won-dollar exchange rate, and an outflow of foreign capital.

However, there is also criticism that avoiding fiscal spending out of fear of such an increase in the national debt ratio is a typical way for the government to evade responsibility. Lee Joon-gu, Professor Emeritus of Economics at Seoul National University, explained, "Depending on the situation, it is necessary to temporarily abandon sound fiscal policy and boldly use deficit financing. If additional government spending through bond issuance revitalizes the economy and allows future generations to earn higher incomes, the argument that the burden is shifted to future generations is not valid."

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

While the low interest rate trend has lowered government bond yields, there are concerns that the actual burden may still be large due to the decline in growth rates. Kim So-young, Professor of Economics at Seoul National University, noted, "Although government bond yields have decreased, reducing interest costs, the damage from the severe growth slowdown will be significant. When growth rates fall, the capacity to repay debt decreases accordingly." The lowest government bond yields (3-year) were ▲6.800% during the 1998 IMF crisis ▲3.410% during the 2008 financial crisis ▲1.781% in 2018, and recently recorded 0.960%.

If an inertia-driven supplementary budget is prepared for economic stimulus, it is only a matter of time before the national debt ratio exceeds 50%. Professor Hong expressed concern, saying, "The government expected the debt ratio to exceed 46% in 2023 when announcing the mid-term fiscal plan in 2019 due to low birth rates and aging. This estimate did not reflect the impact of COVID-19, so considering that, it will soon exceed 50% significantly."

As the national debt increases significantly every year, there are calls for clear standards to be established accordingly. The Ministry of Economy and Finance submitted the Fiscal Soundness Act, which included a 'national debt ratio limit of 45%', to the National Assembly during the Park Geun-hye administration in 2016, but it remains pending. With the end of the 20th National Assembly, it is expected to be automatically discarded. This time, the Ministry may not specify a particular figure for the national debt ratio but may only present a 'fiscal rule guideline.' A ministry official said, "If specific numbers are written in the Fiscal Soundness Act, it would impose significant constraints on flexible fiscal management. 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.