Record National Debt Calls for Fiscal Stabilization Measures

As government spending has grown, both the fiscal deficit-to-GDP ratio and the national debt-to-GDP ratio have reached record highs. Moreover, with next year’s budget proposal finalized, we are now entering an era in which the national debt-to-GDP ratio is in the “50% range.” This means the country has taken on debt equal to roughly half the value produced by all domestic economic actors in a year. As national debt continues to rise, the nation is expected to enter the 1,000 trillion won era of government debt for the first time in history.

Some people take comfort in the fact that South Korea’s national debt is lower than that of other countries. But it is wrong to make a simple comparison between South Korea and reserve currency countries, which can absorb shocks by issuing currency even when foreign capital flows out. Moreover, among OECD countries, South Korea’s debt is increasing at the fastest pace. According to an IMF report, in projections for 2022 to 2026, South Korea is expected to rank an overwhelming first in debt growth, with an increase rate of 4.89%. During the same period, the average for G20 countries stands at just 0.06%, meaning South Korea alone is increasing its debt in an especially reckless manner.

Even the pace of debt growth under the Moon Jae-in administration has been extremely fast compared with other administrations that took office in the 2000s. People often say the cause was the COVID-19 crisis. However, a closer look shows that even before COVID-19, the current government increased fiscal spending whenever it put political slogans first, and government debt also rose sharply. This vote-buying style of fiscal expansion then grew even further, using COVID-19 as an excuse and losing all restraint.

As national debt increases, so does the interest burden the government must bear. In other words, as the debt ratio rises, money that could be used for more important purposes must instead be spent simply on repaying debt. The burden also grows not only for the government but for private companies as well. As debt increases, the country’s overall creditworthiness declines, forcing businesses to pay higher interest even on foreign loans they borrow. This debt-expanding policy worsens long-term damage. Both the government and businesses fall into a vicious cycle, while the public sinks ever deeper under the burden.

What is especially concerning is the nature of fiscal spending. Since COVID-19, South Korea’s fiscal policy has shown a tendency to move beyond temporary crisis response and toward permanent expenditures, such as expanded child allowances and higher basic pensions. This means that long-term burdens will increase substantially even without any policy changes. As the population ages, the number of taxpayers will shrink while the number of people receiving tax-funded support rises sharply, causing social security spending to surge. This pattern will continue to worsen the fiscal situation.

In light of the speed of debt growth and the nature of spending, fiscal deterioration is likely to continue for the time being. Major countries abroad have begun efforts to normalize bloated public finances expanded by COVID-19, but our government is leaving loose fiscal management unchecked. The ruling party and the government continue to repeat that because the national debt ratio is still low, it is acceptable to borrow and spend more. This is an irresponsible view that ignores reality.

Now is the time to stop wasting tax money through massive fiscally funded giveaways. We must not keep repeating spending of unclear effectiveness, such as short-term government job creation, monthly rent support for young people, and national disaster relief payments. This is the time to think carefully about what will provide real help to the people. Populist policies aimed merely at winning public favor waste tax money and only increase the nation’s debt.

Fiscal resources are not infinite. Even as excessive fiscal spending is emptying the national coffers, the current government is turning a deaf ear. Before an even greater crisis arrives, now is the time to prepare fiscal stabilization measures.

Sung-no Choi, President, Center for Free Enterprise (CFE)

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Original title: 역대 최대 나랏빚, 재정 안정화 대책이 필요한 때

Author: Sung-no Choi

Date: 2021-12-15

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=24388