Handing debt to next generation

Columns

Published: 06 Jan. 2022, 20:25 Updated: 06 Jan. 2022, 20:28

Handing debt to next generation

Jung Hong-sang
The author, a former executive director of the APEC Climate Center, is an instructor at the Korea Advanced Institute of Science and Technology (Kaist).

As politicians make campaign promises, the budget is growing in size. But there is no mention on how to raise the funds. When government spending is increased, it is the citizens who benefit from it, but it is also the people who have to pay more. When benefits grow, costs will go up for sure. In Europe and the U.S., when a project is drawn up, it should be clarified how to raise the money and which tax is increased and by how much.

There are only three ways to raise money for government spending: collecting more taxes; reducing other spending, such as social welfare; and issuing government bonds. As our fiscal deficit is almost structural, an increase in government spending naturally expands our national debt. Nothing is free. National debt has to be paid someday by someone paying more taxes. Until then, interest has to be paid. It is just like borrowing money from the future.

Some say that we don’t have to worry about the debt as Korea’s national debt is 50 percent of the GDP, far lower than the OECD average of 110 percent. But a simple comparison is not appropriate here. To see the feel on the people or impact on the national economy, it should be compared on a per capita basis.

According to the Statistics Office, the total population is expected to decrease from 52 million to 40 million by 2070. If the size of a household decreases from five to four, the per-person burden will grow by one fourth. Likewise, when the entire population decreases from 50 million to 40 million, the per-person burden grows by one fourth.

Another factor is population structure. Simplifying the national economy, the economically active population between 15 and 64 supports citizens under 15 and above 64. That means the national debt is to be paid by the middle section of the population. However, as aging is faster in Korea than in other OECD members, the working-age population is rapidly shrinking.

The total-age-dependency ratio refers to the sum of the young population (under age 15) and elderly people relative to the working-age population (age 65 and older). The ratio will jump from 40 percent in 2020 to 110 percent in 2070. As a result, the per capita burden of the working-age population is to increase by 56 percent.

Talking into account the population decline and the structural factors, the per capita national debt is supposed to grow 90 percent more than the simple calculation. Then, Korea’s national debt is already close to the OECD average.

It is hard to reduce government spending once it is increased. So, national debt will gradually grow. As the aging of population progresses, production will dwindle, less tax will be collected, and government spending on welfare and medical care will grow, resulting in rapid growth in national debt.

In Britain, Germany and Japan, the national debt more than doubled from when they became aging societies. Korea also has the North Korean variable. In case of emergency, considerable government spending is inevitable. But it is unclear how much will be needed, like a contingent liability of a company. That’s why we must leave the room for buffer.

When presidential candidates propose campaign promises, voters must ask how the fund will be raised. They also must examine if it is realistic. Sweet pork barrel projects should be judged along with the bitter bill. It should be calculated how we would damage our future generation’s capacity to pursue happiness. It is shameful to habitually rely on future generations to alleviate the pains of the current generation.

Translation by the Korea JoongAng Daily staff.

Flanked by his campaign staff, ruling Democratic Party (DP) presidential candidate Lee Jae-myung, former Gyeonggi governor, proposes ambitious plans to help small merchants and the self-employed, including issuing local currencies and coupons worth 50 trillion won ($41.7 billion) for the entire population, in December. [LIM HYUN-DONG]