Hankyung Research Institute: "Larger Than Foreign Exchange and Financial Crises"... National Debt Ratio Expected to Rise by 5.4%P

Expected Increase in National Debt of 111.4 Trillion Won
Need for Mid- to Long-Term Fiscal Rule Legislation

[Asia Economy Reporter Dongwoo Lee] It is forecasted that the increase in South Korea's national debt ratio this year will surpass that during the financial crisis and the foreign exchange crisis. There are calls to curb the rapidly rising national debt ratio through the legalization of mid- to long-term fiscal rules.

On the 29th, the Korea Economic Research Institute (KERI) projected, based on data from the Ministry of Economy and Finance, that South Korea's national debt ratio will rise to 43.5% this year, up 5.4 percentage points from 38.1% last year.

This increase exceeds the annual rise during the 2009 global financial crisis (3.0 percentage points) and the 1998 foreign exchange crisis (3.9 percentage points). The expected increase in the amount of national debt this year is anticipated to be 111.4 trillion won, which is 60.8 trillion won more than the previous year.

KERI stated, "Due to the prolonged impact of the COVID-19 pandemic, the amount equivalent to 5.4% of this year's Gross Domestic Product (GDP) could be added to the national debt."

KERI also expects the pace of increase in the national debt ratio to accelerate further. While the national debt ratio is expected to enter the 40% range this year, it is predicted to reach 51.7% three years later in 2023.

This means that the national debt ratio will rise from the 40% range to the 50% range in just three years, which is 4 to 6 years shorter than the period it took for the national debt ratio to increase by 10 percentage points in the past. In fact, it took 7 years for the national debt ratio to rise from the 10% range to the 20% range, another 7 years to go from the 20% range to the 30% range, and 9 years to increase from the 30% range to the 40% range up to this year.

KERI analyzed that if the integrated fiscal balance deficit ratio increases by 1 percentage point, the national debt ratio rises by 0.6 percentage points. This implies that excessive fiscal spending relative to government revenue leads to an increase in the national debt ratio.

On the other hand, KERI revealed that if the nominal economic growth rate increases by 1 percentage point, the national debt ratio decreases by 0.2 percentage points. This is because a higher growth rate reduces the demand for national debt and increases GDP, thereby lowering the national debt ratio.

Additionally, KERI stated that if the 3-year maturity government bond yield rises by 1 percentage point, the national debt ratio decreases by 0.4 percentage points. This is analyzed to be because rising interest rates can act as a positive economic indicator, and under similar conditions, higher interest rates align with financial market behavior that avoids bearing debt.

Choo Kwang-ho, Director of Economic Policy at KERI, emphasized, "Although fiscal spending is necessary due to the economic recession caused by COVID-19, targeted and focused fiscal policies rather than scattergun approaches are required. Legalizing and adhering to fiscal rules such as spending within revenue during normal times can minimize the economic burden caused by increased fiscal spending during exceptional periods."

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