The Era of 1,000 Trillion Won Government Debt Including Public Institutions (Comprehensive)

Last Year, General Government Debt (D2) Increased by 121 Trillion Won to 1,066 Trillion Won
Public Sector Debt (D3), Including Non-Financial Public Enterprises, Approaches 70% of GDP

[Asia Economy Sejong=Reporters Kim Hyewon and Lee Dongwoo] Last year, the general government debt (D2), which includes the government and non-profit public institutions, surpassed 1,000 trillion won for the first time in history. The ratio relative to the gross domestic product (GDP) also exceeded 50%. Public sector debt (D3), which includes the government and non-financial public enterprises, approached 1,430 trillion won, an increase of about 147 trillion won from the previous year, with the ratio to GDP nearing 70%.

On the 15th, the Ministry of Economy and Finance announced the results of the "2021 General Government Debt (D2) and Public Sector Debt (D3) Calculation." The government manages debt statistics in three categories: national debt (D1), general government debt (D2), and public sector debt (D3). D1 is calculated by combining central and local government debt, D2 adds non-profit public institution debt to D1, and D3 further includes non-financial public enterprise debt on top of D2.

Due to responses to the COVID-19 crisis and other factors, all types of debt in South Korea increased last year. D1 stood at 970.7 trillion won, representing 46.9% of GDP. This year, the era of annual national debt exceeding 1,000 trillion won has already been established. Last year, both D2 and D3 set new records in absolute size and GDP ratio since statistics began in 2011.

Last year, D2 reached 1,066.2 trillion won, an increase of 121.1 trillion won from the previous year (945.1 trillion won). This is the first time D2 has exceeded 1,000 trillion won. The ratio to GDP rose 2.8 percentage points from the previous year to 51.5%. Notably, this is close to the average of non-reserve currency countries among major advanced economies (56.5%). Although the D2 ratio has been increasing since 2019, the rate of increase slowed compared to the previous year (6.6 percentage points).

Last year, D3 was 1,427.3 trillion won, up 147.4 trillion won from the previous year (1,280 trillion won). The ratio to GDP increased by 2.9 percentage points to 68.9%. The D3 ratio has steadily risen since 2019. The Ministry of Economy and Finance pointed out, "Considering mid- to long-term fiscal conditions such as low birthrate, aging population, and declining growth potential, efforts to strengthen fiscal soundness management are necessary for sustainable finance."

COVID-19 Expansionary Fiscal Policy Compounded by Public Enterprise Debt... Swelling National Debt

Last year, the national debt encompassing central and local governments and public institutions swelled simultaneously, which is interpreted as a continuation of expansionary fiscal policy to respond to COVID-19. Additionally, the government and political circles suppressed increases in public utility fees such as electricity and gas, causing a sharp rise in debt of public enterprises like Korea Electric Power Corporation (KEPCO), which also contributed to the deterioration of fiscal soundness.

According to the "2021 General Government Debt (D2) and Public Sector Debt (D3) Calculation" results announced by the Ministry of Economy and Finance, general government debt (D2), including central and local governments and non-profit public institutions, surpassed 1,000 trillion won for the first time. Its share of GDP also rose to 51.5%. While the national debt (D1) indicator, often referred to as "national debt," is for internal use, D2 is used by international organizations such as the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) for cross-country debt comparisons. The D2-to-GDP ratio rose from 40% in 2018 to 42.1% in 2019, 48.7% in 2020, and surpassed 50% for the first time last year. This level is close to the average of non-reserve currency countries among major advanced economies such as Sweden and Norway (56.5%). Most of last year’s D2, 975.7 trillion won, was debt from central government accounts and funds. The government issued 110.4 trillion won in treasury bonds last year and increased borrowings by more than 12 trillion won, including from the Housing and Urban Fund subscription savings. Local government debt increased by 7.4 trillion won, while education autonomous body debt decreased by 1.7 trillion won due to favorable education finance grants.

Adding non-financial public enterprise debt, D3 grew so large that its ratio to GDP approached 70%. The absolute size of D3 was 1,427.3 trillion won, an 11.5% (147.4 trillion won) increase from the previous year. The ratio to GDP rose from 66% in 2020 to 68.9%, up 2.9 percentage points.

The main reason for the increase in D3 is that the government issued many treasury bonds to respond to COVID-19, increasing D1 and D2, but it is also important to note that pure non-financial public enterprise debt increased by 31.6 trillion won (0.2 percentage points) compared to the previous year. In particular, central non-financial public enterprise debt rose by 33.9 trillion won to 403.6 trillion won.

This is due to KEPCO and its power generation subsidiaries increasing borrowings and issuing corporate bonds up to their limits to secure operating funds. KEPCO and its subsidiaries’ debt alone increased by 11.6 trillion won from the previous year, totaling about 113.7 trillion won. Korea Gas Corporation also increased its debt by 5.8 trillion won in borrowings and bonds within one year, accounting for 30 trillion won of D3. This phenomenon occurred because public utility fee increases, such as electricity rates, were politically suppressed and not implemented in a timely manner. The problem is that for KEPCO, it is practically difficult to raise electricity rates enough next year to eliminate deficits. According to KEPCO, raising the electricity rate by 1 won per kWh (kilowatt-hour) can reduce debt by 500 billion won annually. To eliminate KEPCO’s accumulated deficit of 30 trillion won this year, electricity rates would need to be raised by about 60 won per kWh annually.

The government raised electricity rates by a total of 19.3 won this year, including the base fuel cost and fuel cost adjustment charges. Next year, it is likely to maintain a similar increase to stabilize livelihoods. The financial industry expects KEPCO’s debt ratio to soar from 223.23% last year to 424.9% this year and 617.04% next year.

The government intends to focus on strengthening fiscal soundness management, including legislating fiscal rules next year, but the challenge lies in the high barrier of the National Assembly. The Ministry of Economy and Finance stated, "We will promptly pursue legislation on fiscal rules and reform bills for local education finance grants, and prepare follow-up legislative measures. Based on long-term fiscal outlooks, we will diagnose risks to our fiscal health and establish mid- to long-term fiscal strategies such as ‘Fiscal Vision 2050’ to address them."

International organizations and major credit rating agencies are also closely monitoring South Korea’s future fiscal burden risks and agree on the need for fiscal management. The OECD stated in last month’s economic outlook, "To ease high inflationary pressures and prepare for rapid aging, the National Assembly needs to adopt fiscal rules." Fitch commented, "Long-term expenditure needs due to aging are a medium-term credit rating pressure factor," and "The newly introduced fiscal rules will help manage public sector debt risks."

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