75% of Economists "Concerned Even if National Debt Ratio Is Lower Than OECD Average"

Korean Economic Association 'Economic Discussion'

[Asia Economy Reporter Eunbyeol Kim] More than seven out of ten domestic economists disagreed with the claim that "the government's national debt ratio is not a big problem." Although the government evaluates fiscal soundness as good because the national debt level is much lower than the average of OECD countries, economists remain concerned.

According to the "Survey on National Debt" economic discussion conducted by the Korean Economic Association on the 7th targeting domestic economists, 75% of respondents answered that they do not agree with the position that "there is no big problem because the national debt ratio is less than half of the OECD average." Among them, 40% expressed "mild disagreement," and 35% expressed "strong disagreement."

According to the medium-term fiscal management plan submitted to the National Assembly by the government earlier last month, the national debt ratio in 2024 is expected to be close to 60%.

Professor Tae-yoon Sung of Yonsei University’s Department of Economics stated, "It is difficult to say that the current national debt ratio itself is high, but the current pace of fiscal expenditure expansion is becoming dangerously fast," adding, "Meanwhile, since securing sufficient revenue sources has not been adequately achieved, the increase rate of the national debt ratio can be evaluated as very rapid." He also emphasized, "If the national debt ratio rises, issues with principal and interest repayment inevitably arise, and especially for a country like ours with high external dependence, it can affect overseas creditworthiness. It is necessary to reduce government expenditures on subsidies that can restrict competition and distort resource allocation, and focus spending on areas that can contribute to economic growth by increasing productivity and accumulating human capital."

However, there were also views that somewhat agreed with the government's claim. Professor Deok-hyun Ryu of Chung-Ang University’s Department of Economics said, "It is not simply because it is less than half of the OECD average; various factors should be considered in the national debt ratio," adding, "Considering the national debt burden capacity, government bond maturity structure, downward trend in borrowing costs, and foreign ownership structure, the Korean economy can handle this level."

Regarding the goals or standards for national debt management, 36% of economists answered that meeting medium- to long-term fiscal sustainability is sufficient. Professor Woo-chan Kim of Korea University said, "Securing sustainable finances in the medium to long term is important," adding, "Fiscal sustainability ultimately means not relying solely on deficit bonds, that the debt repayment burden on the next generation is not large, and that national creditworthiness is good." He continued, "Fortunately, our country still has room to expand tax revenue due to a low tax burden rate," and said, "In addition to improving fiscal expenditure efficiency, reorganizing tax exemptions and reductions, and strengthening taxation on undeclared income, an additional increase in personal income tax rates is also necessary."

Regarding the introduction of fiscal rules, half (50%) said that "it is necessary to prioritize the discretion of fiscal authorities but utilize soft fiscal rules that do not specify concrete figures in the law." This means that while introducing fiscal rules with legally binding specific figures, exceptions should be allowed so that fiscal policy can play an active role in crisis situations like the current one. This view aligns with the Ministry of Economy and Finance’s announcement recognizing exceptions to fiscal rules.

As the most serious threat or risk factor to future fiscal management in Korea, 59% answered "population structure changes due to aging and low birthrate." This was followed by low growth due to weakened growth engines (18%) and the ruling of parties advocating expanded government roles (10%).

Professor Woo-chan Kim said, "Expenditures for expanding welfare and social safety nets should be covered by increasing tax revenue, so they themselves cannot be a threat factor, but the problem is that population structure changes due to low birthrate and aging make this difficult." He added, "The decrease in the economically active population due to low birthrate will lead to a reduction in the tax base and a decrease in national pension insurance premium income, and aging will sharply increase medical welfare expenditures and national pension benefits."

Professor In-sil Lee of Sogang University said, "In the long term, changes in population structure are the most threatening, but currently, the biggest concern is the sense of responsibility of fiscal authorities who must manage fiscal rules and the political circles that enact them."

Meanwhile, the Korean Economic Association’s "Economic Discussion" is modeled after the IGM Forum of the University of Chicago in the United States and serves as a platform for economic experts to share views on current Korean economic issues.

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