The Korea Times


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[ED] Regain fiscal health

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Concerns grow over rapid indebtedness

The country has plunged deeper into debt, heightening concerns about its fiscal soundness. It may face devastating consequences unless it takes bold measures to reduce the debt. That's why the incoming Yoon Suk-yeol administration needs to shift to fiscal tightening away from the Moon Jae-in government's fiscal easing.

Korea's national debt, which comprises bond issues and borrowings by central and provincial governments, totaled 967.2 trillion won ($796 billion) last year, up 14 percent from 2020, according to a report by the Ministry of Economy and Finance. The debt growth rate is alarming even though the government had to expand its spending to cope with the economic fallout of the COVID-19 pandemic.

Last year, the Moon administration drew up two extra budgets amounting to 50 trillion won to provide financial support for businesses, particularly smaller ones and the self-employed, to make up for their losses caused by the pandemic. The sum came on top of the liberal government's annual mega-budget of 558 trillion won. This prompted the debt-to-GDP ratio to surge to 47 percent in 2021, up from 43.8 percent in 2020.

Making matters worse, the ratio is predicted to rise further to 50.1 percent this year, as the national debt is likely to reach 1,075 trillion won. Some economists forecast the ratio to surge to as high as 67 percent in 2026 if the rising debt trend continues. However, the Moon government has so far turned a deaf ear to critics' warnings against its spending spree.

It is not too much to say that the country is on the verge of falling into a debt trap. Many countries around the world are now turning to fiscal tightening to absorb excess liquidity created by fiscal and monetary easing amid the pandemic. Korea should follow suit before it's too late. The U.S. Federal Reserve has already begun winding down the quantitative easing program. It is now moving toward quantitative tightening while raising its key interest rate to tame soaring inflation.

Debt owed by consumers and businesses is also a cause for concern. Household debt hit a record high of 1,862 trillion won at the end of last year, while corporate debt totaled 2,361 trillion won. The state liabilities ― a total of bond issues, borrowings and future pension payments ― reached 2,196 trillion won in 2021, up 214.7 trillion won from 2020.

The president-elect should focus on reducing the growing national debt. His first Prime Minister-nominee Han Duck-soo said he would make efforts to regain fiscal soundness if his nomination is approved by the National Assembly. Yet what is worrisome is Yoon's push for an extra budget of 50 trillion won to keep his campaign promise to compensate small business owners and self-employed people for their losses arising from COVID-19 restrictions. Such a budget, which seems inevitable to help those hit hardest by the pandemic, could also increase the government debt and raise inflationary pressure.

Yoon and his economic team must do everything they can to restore fiscal health and reduce the skyrocketing household debt. They also need to tame inflation which surged to 4.1 percent year-on-year last month, the highest level in a decade. The country cannot enjoy sustainable growth without tackling the debt issue and keeping inflation in check.

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