National debt piling upThe national debt has been rising at a staggering pace. The 2019 fiscal settlements report from the Ministry of Finance was full of new records. National liabilities hit an all-time high of 1,743 trillion won ($1.4 trillion). The D1 — combined debt of central and local governments — also reached a record high of 728 trillion won. The national debt-to-GDP ratio was at a historic level of 38.1 percent.
This year’s balance is bound to worsen. National liabilities were estimated at 805 trillion won when the government packed up the 2020 budget of 512 trillion won. The debt would stretch after supplementary budgeting to fight the economic fallout from the coronavirus. The deficit will snowball as tax revenue further slows and spending increases. Tax revenue from companies, individuals and value-added sales will likely shrivel due to restricted and slumped economic activities from the virus threat. With economic growth likely to slow further, the fiscal deficit may widen to 100 trillion won and debt-to-GDP could exceed 43 percent by the end of the year.
The debt growth pace had been a concern under the aggressive fiscal policies of the Moon Jae-in administration even before the Covid-19 crisis. The government was accused of being “addicted” to fiscal profligacy to compensate for the damages of its reckless income-led growth policy. Yet the government justified its spending plan, insisting that crops will rot if they are stockpiled.
The so-called Maginot Line of 40 percent debt-to-GDP no longer stands. South Korea’s debt ratio remains passable when compared to other advanced economies. But Korea is not a country of key currencies. If its fiscal integrity comes under question, its sovereign credit could take a hit. Korea could face a bigger challenge than the Covid-19 fallout. It must safeguard its fiscal coffers.
But politicians are carefree about fiscal conditions, as they are entirely engrossed in winning the April 15 parliamentary elections. Rival parties all argue that relief aid should be given out to the entire population instead of the government proposal of paying out money to the lowest-earning 70 percent of households. Fiscal stimuli are inevitable to mitigate the harm from the spread of the virus. But if we use up all of our savings, there won’t be any left for future rainy days. Before digging ourselves into further debt, restructuring and streamlining in spending must come first. Instead of spending to prop up exports, investment and consumption, the government must remove stifling regulations and create a favorable business environment. If the government continues spending at this rate, Korea will end up bankrupt like some southern European states.