[Desk Column] National Debt = Good Debt? Still, the Bill Comes Flying In

The decision will be made in 5 days. The new president who will lead the Republic of Korea for the next five years. Although this presidential election, summarized by unfavorable impressions and an ultra-close race, is said to be an unprecedented election, there is one predictable fact. Regardless of who wins, a second supplementary budget (추경) will be implemented after the election ends. Ahead of the unprecedented 'February supplementary budget,' Democratic Party candidate Lee Jae-myung and People Power Party candidate Yoon Seok-youl have each claimed that an additional 35 trillion won and 50 trillion won, respectively, should be spent to support self-employed individuals affected by COVID-19. Although the exact amount has not been determined, an additional supplementary budget is a foregone conclusion.

The problem is the national debt. According to the Ministry of Economy and Finance's analysis, the fiscal deficit for this year is expected to reach 70.7 trillion won due to the first supplementary budget. The national debt-to-GDP ratio is projected to rise to 50.1%. While politicians and economists debate the appropriate level of the national debt ratio, one undisputed fact remains: the debt-to-GDP ratio exceeding 50% is a figure we have never seen before. Moreover, the trend of increasing debt ratio is not a good sign.

How did the warning signs appear in the fiscal soundness we once took pride in? The biggest cause is COVID-19. As the pandemic halted the movement of people and goods and the global economy slowed down, governments worldwide competitively resorted to fiscal expansion. South Korea was no exception. The Moon Jae-in administration spent over 133.5 trillion won through supplementary budgets after the COVID-19 outbreak.

The political sphere also increased government spending. This is because supplementary budgets executed under the banner of COVID-19 damage support were often prepared ahead of major elections. Not only the current supplementary budget prepared just before the presidential election but also the supplementary budgets coincided with last year's Seoul and Busan mayoral by-elections. The same occurred around the April 2020 general election. Of course, a significant portion of these funds was likely used to support self-employed and small business owners who suffered losses due to government quarantine policies. However, since these supplementary budgets were prepared in conjunction with elections, there is suspicion that some of the cash resources were used in a populist manner. The bigger problem is that ahead of the presidential election, leading candidates from both major parties are proposing populist pledges involving massive fiscal expenditures. The cost to implement the approximately 270 pledges made by candidate Lee exceeds 300 trillion won. Candidate Yoon also needs to invest over 266 trillion won to fulfill more than 200 pledges.

Debt is hard to take on initially, but once incurred, vigilance diminishes. National debt is even more so. Since individuals do not feel it immediately, it is sometimes packaged as 'good debt' used for the people. Wasn't there a presidential candidate who said that national debt is borrowing future resources in advance?

However, national debt is money that must be repaid. Interest must be paid diligently. If we fall into the trap of 'good debt,' we might end up like Greece or Italy, which suffered the aftereffects of expanded fiscal spending following the global financial crisis. Raghuram Rajan, a global economist and professor at the University of Chicago (former IMF chief economist and former governor of the Reserve Bank of India), said, "If everyone wants a 'free lunch,' the bill will ultimately have to be borne by those least able to afford it." It is time to quickly reestablish the rapidly deteriorating fiscal discipline. Otherwise, the fiscal rules scheduled to be applied from 2025 may never come into effect and disappear.

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