[Asia Economy Reporter Ki-min Lee] Concerns have been raised that South Korea's national debt ratio is showing signs of a sharp increase in the future, signaling a red alert for fiscal sustainability.

The Korea Economic Research Institute (KERI) stated on the 2nd that the country is at a crossroads of a vicious cycle of rising national debt and fiscal deficits, and urged the need to devise measures to overcome the current situation.

KERI first diagnosed that the national debt ratio, which had been rising gradually, is now showing signs of a steep increase. South Korea's national debt ratio rose from 27.5% in 2007 to 35.9% in 2018, recording an average annual increase of less than 1 percentage point, but jumped 2.2 percentage points to 38.1% last year compared to the previous year.

KERI pointed out that this was due to a sharp decline last year in the primary balance ratio, which is the fiscal balance ratio excluding interest payments relative to Gross Domestic Product (GDP). In particular, this year, the spread of the novel coronavirus disease (COVID-19) is expected to further increase the rise in the national debt ratio.

Additionally, based on fiscal expenditure forecasts from last year to 2023, KERI calculated the Tax Gap at 2.2%. The Tax Gap refers to the difference between the revenue ratio (government income) required to maintain the current national debt ratio and the actual revenue ratio. Recording a positive value rather than a negative one indicates that South Korea's fiscal sustainability is gradually deteriorating.

KERI diagnosed that South Korea should follow the path of Germany, which succeeded in stabilizing its national debt through continuous fiscal surpluses. Germany recorded a primary balance deficit of -2.3% in 2010 but maintained continuous surpluses from 2011, reducing its national debt ratio from a peak of 90.4% in 2012 to 69.3% last year, lowering it by 21.1 percentage points over seven years.

Choo Kwang-ho, Director of Economic Policy at KERI, emphasized, “We must follow the path Germany took by setting limits on the national debt ratio, legislating balanced budget rules, and making efforts to reduce fiscal expenditures such as selective welfare. Additionally, we need to raise growth rates by creating a favorable business environment through regulatory reforms and enhancing labor flexibility.”

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