Throwing bombs, as debt explodes
The author is an editorial writer of the JoongAng Ilbo.
I may be on the pessimistic side. Still, I cannot but worry about the ballooning debt. Korea’s national liabilities exceeded 800 trillion won ($718 billion) as of September, requiring 22.7 trillion won in interest payments next year, according to the latest data from the Ministry of Finance. There is no need for panic just yet. But given the way the government is spending, concerns around the state of the nation’s fiscal health are rising fast.
Yet the government has no plan to slow down on its stimuli streak. The coronavirus crisis, having lasted for nearly a year now, inevitably causes dents in public finance. Under its mid-term outline, the government would be running a deficit of more than 100 trillion won annually for the next four years. At that pace, national debt would top 1,000 trillion won by 2022 and reach 1,327 trillion won in 2024.
The government assures us there is no need for worry, pointing to its national debt-to-GDP ratio, which stands around 40 percent. That’s far below of the 110 percent average for Organisation for Economic Cooperation and Development (OECD) member nations. But the argument can be misleading. The OECD average has gone up due to a few heavily-indebted countries like Japan, with its 225 percent debt-to-GDP ratio, and Italy, with a 156 percent ratio. Many others, like New Zealand, Australia and Switzerland, maintain theirs at 30 to 40 percent. Even northern European countries with generous social benefits hold up theirs in the 40 percent range.
The debt-to-GDP ratio announced by the Moon Jae-in administration only reflected government debt. A country’s fiscal integrity must also count when it comes to household, corporate and public-sector debt. International credit rating agencies study overall public and private debt levels when rating sovereign debt. They pay attention to the banking sector’s credit risks. If lenders are at risk, the government must take responsibility. Debt must incorporate household, corporate and public enterprise borrowing as well. In the eyes of global rating agencies, governments are obliged to guarantee debt obligations of individuals and companies.
When Korea’s private and public debts are combined, their total will have exceeded 5,000 trillion won by now, since the tally was 4,916 trillion won at the end of December 2019. Such a load would overwhelm our GDP by 260 percent, on par with the levels of the United States and Europe. The dollar and euro zones at least have currencies that trade internationally.
The argument that nearly 90 percent of Korean government debt is held at home also cannot be a comfort. If Korea prints out money to support liquidity, the won value could crash and cause capital flight. During the 2008-2009 global financial crisis, the U.S. dollar and euro did not tumble even at record monetary easing. They are different because they have reserve currencies.
But the ruling Democratic Party (DP) is carefree. Politicians are mostly concerned about immediate votes and not the country’s future. They are not liable to pay up, since national debt is covered by taxes. Therefore, fiscal management guidelines are necessary. The guidelines contain spending that can burden national coffers in the future.
But the guidelines the government announced last month can hardly offer protection. It proposes that fiscal debt should not exceed 60 percent of GDP and its annual deficit should not surpass 3 percent of GDP. At this rate, national debt could soon hover above 100 percent of GDP. Still, Deputy Prime Minister and Finance Minister Hong Nam-ki pushed back against accusations that he had simply put a show by offering his resignation after fully indulging the DP’s demands.
Household and corporate debt has also been surging. It is not just because of the Covid-19 fallout. Household debt is caused largely by runaway housing and rent prices. As home purchases became almost impossible due to the government’s tight regulations on the housing market, individuals are engrossed with stock investment through borrowed money. The entire country is on a debt binge.
During a debate held in the National Assembly on Nov. 12, 2014, President Moon Jae-in, representing the opposition at the time, took part in the theme of income-led growth. In his speech, Moon criticized the Park Geun-hye administration for promoting economic growth through debt, pointing to rapid growth in household debt. “Debt-led growth is a reckless policy of leaving a bomb for the next government,” he said.
But household debt is surging at an even more rapid pace under the Moon administration. It’s a dangerous bomb-throwing game.