Report lays out the risks of increasing expenditures

The new administration will have to be aware that increased spending could pose a threat to the economy, says a report commissioned by the government.

The report yesterday by a group of private macroeconomic and finance experts said the government has been managing debt at a stable level, but it must examine the risk of increasing welfare spending, and mounting debt for public institutions and households.

Accelerated aging of the population is at the heart of the concern, the report said. About 11 percent of the population was age 65 or older in 2011, the lowest rate among Organization for Economic Cooperation and Development countries. However, the percentage of older Koreans is forecast to soar to 38.2 by 2050.

Meanwhile, a low fertility rate would be an added complication, according to the report. If the fertility rate continues to hover around 1.23 births per woman of childbearing age, the elderly population will account for 72 percent of total public support by 2050, up from 37 percent in 2010.

Mandatory government spending is predicted to keep increasing for the next several years, the experts said, with more than 40 percent going for welfare. Mandatory spending accounts for 46.7 percent of total government expenditures, but is forecast to reach 51.6 percent by 2016.

The report said that if current trends continue, the National Pension Service will face a deficit by 2044 and run out of money by 2060.

About 31 percent of Koreans eligible for the public pension program haven’t subscribed to it. “The government needs to get those people to pay premiums and should even raise premiums in order to help secure fiscal soundness,” said Hong Seung-hyun, a researcher at the Korea Institute of Public Finance.

Adding to the woes, public institutions are burdened with massive debt. The combined debt at 286 public institutions in the country jumped from 249 trillion won in 2007 to 463 trillion won in 2011, according to the Ministry of Strategy and Finance. Public entities like Korea Electric Power Corporation and Korea National Oil Corporation account for 95 percent of the debt.

“In a bid to secure fiscal soundness in the long term, the new administration should make efforts to make spending efficient and expand sources of taxation,” Hong said. “Fast rising expenditures on welfare would dent the country’s productivity and cause the Korean economy’s growth to decline further.”

By Song Su-hyun [ssh@joongang.co.kr]