National Debt Increasing by 3.53 Million Won Every Second

Fiscal Deficit of 56.6 Trillion Won from January to April Hits Record High
Rapid Increase in National Debt Could Trigger Credit Rating Downgrade and Foreign Currency Outflow Vicious Cycle
Debt Ratio Debate Rekindled... Experts Agree on the Need for Fiscal Rules

[Asia Economy Reporters Jusangdon and Eunbyul Kim] As the government increases fiscal spending to overcome the novel coronavirus disease (COVID-19) crisis, the national debt is rising at a frightening pace. If the national debt grows sharply, it could lead to a vicious cycle of credit rating downgrades and foreign currency capital outflows. There are urgent calls for discussions on how much debt we can bear and what the appropriate debt ratio should be.

◆ Rapid increase in debt ratio, vicious cycle of credit rating downgrades = According to the Ministry of Economy and Finance on the 9th, based on the third supplementary budget bill this year, the national debt will reach 840.2 trillion won, an increase of 111.4 trillion won (15.3%) compared to last year's settlement (728.8 trillion won). This means the debt is increasing by 305.2 billion won per day, or about 3,532,400 won per second. This is 1,254,300 won more per second than the 2,278,100 won per second calculated by the National Assembly Budget Office as of February.

Dividing the total national debt by the resident registration population of 51,841,371 as of last month, the national debt per capita is 16.21 million won, an increase of 2.15 million won compared to last year's 14.06 million won per capita. Professor Kim Soyoung of Seoul National University’s Department of Economics said, "In crisis situations like COVID-19, the government inevitably has to increase fiscal spending, but the problem is the speed. If the debt ratio rises sharply, simply put, the likelihood that the country cannot repay its debt increases."

If the credit rating is downgraded and the country is classified as "risky," the interest rate at which South Korea borrows money from overseas will rise. Also, the interest on the large-scale government bonds issued to expand fiscal spending will increase. Thus, a rapid rise in the debt ratio acts as a vicious cycle.

◆ Fiscal rules are necessary, but the key is the method = Discussions on the debt ratio are reigniting. A related bill was already introduced as the first bill of the 21st National Assembly on the 5th. Assemblyman Choo Kyung-ho of the United Future Party proposed an amendment to the National Finance Act to limit the national debt ratio and the managed fiscal deficit ratio to 45% and 3%, respectively.

However, scholars have differing opinions on whether the appropriate ratio should be explicitly stated in the bill. Professor Sung Taeyoon of Yonsei University’s Department of Economics said, "Debt management measures are necessary, but if the debt ratio ceiling is fixed, the government's fiscal operation will be too constrained. Instead, discussions are needed on limiting the debt ratio increase to a certain percentage point per year." Professor Kim Sangbong of Hansung University’s Department of Economics said, "Proposing fiscal rules is not about urging the government to spend more money but about discussing standards for government spending. It is better to limit the growth rate over a certain period."

There are also claims that fiscal rules themselves are unnecessary. Professor Kang Namhoon of Hanshin University’s Department of Economics said, "During disaster times like now, the government needs to inject money to revive the economy, but discussions on introducing fiscal rules restrict this. If the government cannot boldly increase fiscal spending due to concerns about fiscal soundness during a recession, the recession worsens, which in the long term further deteriorates soundness."

◆ Reexamined MMT, will it work in Korea? = As the whole world increases debt to respond to the economic shock of COVID-19, Modern Monetary Theory (MMT), once called the "heretic of economics," has recently gained traction. The core of MMT is that no matter how much fiscal deficit the government runs, as long as the central bank prints and supplies money, domestic currency-denominated debt is not a problem unless inflation occurs. However, most experts in the economics community worry that the central bank of a non-reserve currency country like Korea cannot absorb national debt indefinitely.

While it may not be a problem immediately, if national debt is increased without limit, problems such as sharp exchange rate hikes, foreign currency capital outflows, and credit rating conflicts may eventually arise.

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