Spender-in-chiefPresident Moon Jae-in’s commitment to an expansionary fiscal policy through next year endangers the country’s fiscal health. In a meeting on the nation’s fiscal strategy at the Blue House last week, the president vowed to accelerate his administration’s spending until his term expires next May 9. Moon stressed the importance of a complete economic recovery and amelioration of income polarization amid the Covid-19 pandemic, as well as investments for the future. An emergency situation calls for an aggressive fiscal policy. The question is whether Korea can afford spending that leaves unsustainable debt.
The Moon administration has increased its spending without taking into account the inevitable liabilities. It increased the annual budget by around 9 percent for three consecutive years — 9.5 percent in 2019, 9.1 percent in 2020, and 8.9 percent in 2021. The administration drastically raised the rates for income tax, property holding tax and corporate tax over the past four years. Since it ran short of tax revenues from 2021, the government issued national bonds worth 10 trillion won ($89.7 billion). As a result, the country’s national debt is approaching a whopping 100 trillion won.
The red light is blinking in terms of our fiscal soundness, which rapidly worsened after Moon challenged the convention of keeping Korea’s national debt-to-GDP ratio below 40 percent. The National Assembly Budget Office projects the debt-to-GDP ratio to soar to 61.7 percent after passing 50 percent this year. That goes way beyond the level Korea can manage as it is not a key currency country.
Probably due to such concerns, Moon demanded fiscal guidelines from the National Assembly for application from 2025. He can’t avoid the suspicion that the government wants to release liquidity to the market to help win next year’s presidential election. Once increased, national debt rarely decreases.
If Korea’s national debt increases, its sovereign credit rating could be threatened. And if its exchange rate soars, foreign investors will sell shares and flee the Korean bourse. Moreover, as the global economy slowly rebounds along with inflationary pressures, international interest rates are rising so fast that U.S. Treasury Secretary Janet Yellen mentioned the need to raise the U.S. benchmark rate. The Fed can embark on tapering at any time.
The Bank of Korea hinted at the possibility of lifting its benchmark rate within this year after raising its projection for Korea’s growth to 4 percent in 2021. That’s a signal that individuals and companies should cut their debt. If the Moon administration escalates its national liabilities despite these blinking red lights, the next government will have pieces to pick up.