[The Editors' Verdict] The Cost of Low Interest Rates the Next Government Must Bear

[Asia Economy Reporter Ilkwon Choi] The next government will unveil the supplementary budget bill in early next month. It is a challenging dilemma to find a delicate solution in the inverse correlation where loosening fiscal policy causes inflation to soar, and controlling inflation causes the economy to slow down.

The fundamental concern of the new government stems from whether it can secure the supplementary budget of 50 trillion won for public welfare as promised, without incurring national debt. Since the ability to issue deficit bonds has reached its limit and it is no longer possible to absorb the volume in the market, a drastic budget restructuring is inevitable. The principle of cutting 8% of this year’s main budget of 607 trillion won to secure resources has already been established. On the other hand, the current government insists that a large-scale supplementary budget without increasing national debt is impossible. Increasing national debt would raise bond yields and cause instability in the financial market. This is the dilemma that must be resolved to keep the supplementary budget pledge.

Warning signals have already been sounded in the government bond issuance market. The current government’s ability to issue government bonds was virtually exhausted after the first supplementary budget prepared in January this year. Out of the 16.9 trillion won supplementary budget, 11.3 trillion won was financed by debt. It was evaluated as “wringing out a dry towel.”

As already known, the speed of national debt increase since the inauguration of the Moon Jae-in government has been steeper than ever. It rose from 660.2 trillion won in 2017 to 1,075.7 trillion won based on the first supplementary budget in 2022, an increase of over 400 trillion won. This means an increase of about 80 trillion won per year. The national debt-to-GDP ratio expanded from 36.0% to 50.1% during the same period. This is a significant difference compared to the Park Geun-hye administration from 2013 to 2017, when the ratio increased from 32.6% to 36.0%, a rise of about 3 percentage points over four years. There may be an argument that the COVID-19 emergency situation should be taken into account. Narrowing down to after 2020, the amount of newly issued government bonds to finance the COVID-19 response supplementary budgets reached 50.5 trillion won. Bonds worth 52.5 trillion won were issued, and only 2 trillion won was repaid.

The current government and political circles borrowed money and used all the surplus tax revenue to distribute money to as many citizens as possible. In April 2020, an emergency disaster relief fund was prepared, providing 1 million won per household of four or more nationwide. In this process, the government issued 3.4 trillion won in government bonds. Last year, under the name of the COVID-19 coexistence national support fund, 250,000 won per person was paid to the bottom 80% income group. For low-income groups, an additional 100,000 won per person was also given as a gesture. Although national debt was not used, about 31 trillion won of excess tax revenue collected beyond expectations was used as resources. All fiscal capacity, including surplus tax revenue from government bonds, was mobilized.

Meanwhile, conditions for borrowing money have worsened. Inflation, which emerged after the post-COVID era, is becoming stronger. Since it has become a structural problem worldwide, it is no longer a variable but a constant. Augustin Carstens, General Manager of the Bank for International Settlements (BIS), argued earlier this month that “we should weigh the possibility that the inflation environment has fundamentally changed.” If inflation accelerates, interest rate hikes are inevitable. This means the cost of borrowing increases. The BIS pointed out in a 2010 report that “low interest rates eventually become a cost.”

According to the BIS report, the cost of the current government’s money-loosening policy has become the burden of the next government. If efforts had been made to reduce spending even slightly, the difficulty of the supplementary budget that the next government must solve might have been somewhat lower. The cost of underestimating the value of money inevitably follows.

Ilkwon Choi, Head of Political Department

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