Recovering fiscal health

Korea’s integrity in public finance is in danger due to snowballing fiscal deficit and national debt. The fiscal deficit widened to a record 46.2 trillion won ($42.2 billion) in the first half of the year. National debt has now surged to 480.4 trillion won. The ratio of national debt to gross domestic product - a barometer of the fiscal health of public finance - shot up to 36.2 percent. The government won’t be able to meet its promise to lower the debt-to-GDP ratio to below 30 percent by 2015. The National Assembly Budget Office projects the debt level could exceed 37 percent next year and reach 38.4 percent in 2016, threatening the government-imposed Maginot Line of 40 percent.

When the combined total debt of 392 trillion won at 28 public institutions is included, public sector debt could soon reach 900 trillion won. Korea’s sovereign credit rating could be hit, as debt levels are one of the biggest reasons for downgrades. If international borrowing costs spike due to a downgrade in credit rating, the country could be swept up in another financial and liquidity crisis.

The government has also turned anxious about public finance. In a recent meeting, Hyun Oh-seok, deputy prime minister for the economy, pointed out that the danger signs - the worsening fiscal squeeze for local governments and growing debt in public corporations - can threaten the sustainability of public finance amid the economic slowdown. He was implying that the government cannot afford to run such a colossal fiscal deficit and debt.

But the government cannot expect improvement in public finance anytime soon. It embarked on debt restructuring in large public companies. It plans to make heavily debt-ridden companies like the Land and Housing Corporation, Korea Gas Corporation, and Korea Electric Power Corporation sell their assets. At the same time, the government plans to slash social overhead spending to reduce the fiscal deficit. But these efforts won’t help a great deal as long as the economy and tax revenues do not pick up. And as spending on social welfare is scheduled to grow despite the difficult economic situation, the government will have an even greater deficit and more debt next year.

The only way to improve public finance is to reduce spending and increase revenue. But since there is a limit to what the government can do to boost revenue, it should cut spending. Both the ruling and opposition parties promised to work toward balancing the budget when they review next year’s spending plan. The government and the National Assembly must demonstrate a strong will to balance the budget through austerity actions.