Growth policies cited in debt hike

The government’s debt grew to its largest amount last year while the budget balance turned black although more taxes than anticipated were collected, ending a three-year shortfall, while civil servant pension reform also helped lower debt.

The Ministry of Strategy and Finance on Tuesday cited expansionary policies for the increase, including a supplementary budget targeted at creating more jobs and propping up the economy, which quickly cooled after the Middle East respiratory syndrome (MERS) outbreak.

The size of the debt was smaller than initially expected and the debt-to-GDP ratio was relatively smaller than that of other major economies, the government stressed.

The ministry said government debt, which does not include state-run companies, amounted to 590.5 trillion won ($509 billion) last year, a 10.7 percent or 57.3 trillion won increase from the 533.2 trillion won recorded in 2014. As a result, the debt-to-GDP ratio grew 1.9 percentage points from the previous year to 37.9 percent, edging closer to the 40 percent barrier.

The central government’s debt alone amounted to 556.6 trillion won, which is a 10.6 percent year-on-year growth from 503 trillion won last year, or 53.5 trillion won more. The debt-to-GDP ratio also grew 1.9 percentage points from 36.3 percent to 35.7 percent.

“In the process of creating a supplementary budget, the issuances of treasury notes have increased substantially and led to increasing the overall debt size,” said Cho Yong-man, head of the ministry’s fiscal management bureau. “Additionally, the aggressive fiscal policy also led to relatively worsening the budget balance.”

The government last year created an 11.6 trillion won supplementary budget to help overcome the impact of MERS.

The government increased its spending to finance its expansionary policies, which resulted in worsening the overall budget balance. For the first time in six years the budget balance recorded a deficit of 200 billion won. The last time the overall budget balance recorded a deficit was in 2009. This means that last year the government spent more than it earned.

Last year the government raked in 371.8 trillion won while it spent 372 trillion won. This is in contrast to the 8.5 trillion won surplus made the previous year when the government spent 347.9 trillion won while it made 356.4 trillion won.

The operational budget balance - which not only includes total spending and total income but also social security spending made up of public pensions, private school teachers’ pensions, employment insurance and industrial accident compensation insurance - saw the biggest deficit in six years at 38 trillion won. The last time the deficit was close to that size was in 2009 when it was 43.2 trillion won.

The balance sheet worsened despite the country turning around from a tax shortfall that continued between 2012 and 2014, while structural reforms in its civil servant pension system helped lower the debt.

Last year the government enjoyed an 8.7 trillion won surplus in its net tax collection largely thanks to reform in the tax system that raked in more taxes, while raising the tax on cigarettes last year also played a significant role. As a result the government was able to collect 2.2 trillion won more than it originally anticipated. Lowering 5.4 trillion won in its tax income after the supplementary budget was created also helped improve the tax balance sheet.

The government also said it was able to reduce 52.5 trillion won worth of debt, caused by appropriating future pension payments for future government employees, by reforming the pension scheme. The government last year announced freezing the amount of pensions paid to retired government employees between 2016 and 2020. It also said it would extend the age of receiving the pension from 60 years old to 65 while lowering the ratio of pensions that the family of deceased employees receive from 70 percent to 60 percent.

The government, however, isn’t too worried about the record debt. Cho said that because the overall economy is expanding it is natural for the total debt size to gradually increase.

“While the overall nation’s debt increased, the overall trend has improved more than what the government anticipated,” Cho said. “We were worried about the rate of the debt growth, but this too seems to have done better than we’ve anticipated.”

The government said when it created the supplementary budget it expected the overall debt to increase to 595 trillion won, therefore the debt is 4.7 trillion won less than it expected.

It also said the debt to GDP ratio was still manageable.

Korea ranked fifth among the 27 Organization of Economic Cooperation and Development (OECD) member countries with the lowest debt to GDP ratio. It was lower than the OECD’s average 115.2 percent, and much lower than other advanced economies including the U.S. with 110.6 percent and Japan with 229.2 percent.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]