99 percent debt-to-GDP ratio by 2045, ministry predicts
Korea's debt-to-GDP ratio will peak at 99 percent in 2045, the Ministry of Economy and Finance predicts, though the government plans to get that number down to 60 percent by 2060 with big state projects, such as the Green New Deal.
The Finance Ministry on Wednesday released a long-term fiscal outlook report for the first time since 2015.
According to the Korean Statistical Information Service (Kosis), Korea’s debt-to-GDP ratio as of 2019 was 38.1 percent.
The report states that if the current rates of decline in population and GDP growth rate continue, the ratio will keep rising and peak as high as 99 percent in 2045. The projection is based on the premise that the real growth rate drops to 0.5 percent by 2050. Under this scenario, the population is projected to fall by 8.94 million by 2060, and the working age population by 16.78 million.
After the peak, the debt ratio is expected to fall to the 65-81 percent range.
In a better-case scenario assuming a smaller economic downturn and a slowing in the population decline, the projected debt-to-GDP ratio is not much different. The value is expected to increase to the 84-97 percent level by 2044 before it begins to decline.
“Up to mid-2040, the rate of increase for national debt will outpace GDP growth rate. After 2040, the government expenses will decrease, and the debt-to-GDP ratio will also go down,” said Na Ju-bum, the director of the fiscal innovation bureau under the Finance Ministry.
The government’s objective is to take the debt-to-GDP ratio level to 60 percent by 2060 by slowing the economic downturn through initiatives such as the Korean New Deal. This blueprint is criticized for being overly optimistic.
In 2015, the projected debt-to-GDP ratio for 2060 was between 38.1 and 62.4 percent. The government’s National Financial Management Plan for the 2020 to 2024 period states that the debt-to-GDP ratio will hit 58.3 percent as early as 2024. The projected debt-to-GDP ratio stated in the long-term fiscal outlook announced at the end of 2018 was 65.6 percent for 2040 and 85.6 percent for 2050.
“Although the coronavirus outbreak is a special circumstance, if the current level of government spending continues, the growth in the debt-to-GDP ratio, which is already at a dangerous state, will be difficult to curb,” said Ahn Chang-nam, a tax economics professor at Gangnam University. “The prospect that the ratio will fall after 2040 is not a very realistic view.”
“If the government wants to manage the debt-to-GDP ratio to reach its objective, then there needs to be a strong fiscal rule guarded by the law, so that it is not affected by politics,” said Choi Won-seok, a taxation professor at the University of Seoul.
The future of social insurance is dim. If the current policies and economic conditions persist, the national pension will be in deficit in 2041 and be exhausted by 2056. Compared to earlier projections in 2015, the expiry point has moved up by four years.
Regarding welfare, the government stated in the long-term fiscal outlook that social insurance reform is needed, as the current insurance and pension system lacks sustainability in the age of changing demographics.
BY HA NAM-HYUN, LEE JEE-YOUNG [email@example.com]
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